The Island is an anomalous energy field on the earth (as alluded to by Isaac of Uluru). The Swan station is a large capacitor storing the island's energy for experimental uses. In activating the fail-safe, they would be releasing all of the collected energy at once (like a camera flash does with a capacitor), whereas the numbers entered every 108 minutes would discharge small amounts of stored energy, so as not to "overload."
The fail-safe does not cause the discharge, but actually terminates it, much like a machine shop has an emergency panic switch. This is supported by Charlie, who seemingly has not seen the discharge, although he was leaving the Swan when the fail-safe was activated.
Charlie was joking with Claire about not seeing the discharge because it was so blatantly loud and noxious.
When the button is pushed, it releases little bits of electromagnetic energy that is building up to (presumably) keep the island cloak and continuing using it for experiments. When the numbers run down, the fail-safe acts a manual substitution in the case that the computer doesn't work, at which point the fail-safe ends the already occurring discharge, which uncloaks the island.
Another reason why there was a fail-safe was in case there was an intrusion by the hostiles (like The Flame), so if activated, it would become unable to be used by the Hostiles.
Every station may of had it's own intrusion stopper, we only know of two so far.
The Failsafe was designed to do two or three things:
1) Transport the island through time, probably backwards.
Direct exposure to say, 10 years worth of sunlight in the span of 30 seconds explains the harsh, bright light in the sky, as well as the disorientation and "buzzing" the humans on the island experienced during the time travel event. Watch the Season 2 finale again, you'll see what I mean. I also expect a physics geek to back me up when I suggest the purple color was a result of time dilation. Or maybe ultra-violet light would be visible at that level of concentration. Not sure about that one detail.
"10 years worth of sunlight" probably would have burned everyone exposed to it, including, but not limited to Jack, Kate, Sawyer and the Others.
2) Harness the full power of the anomaly to teleport the SWAN station away from the island, thereby draining the anomaly for much longer than 108 minutes; presumably years at a minimum.
The protocol would then (if you follow my logic) have been put in place to assure the availability of the energy for some other purpose. Perhaps the Dharma Initiative was created to figure out the anomaly's practical applications. By having a human in the hatch they could be much more assured that if something unusual happened it wouldn't result in a disaster. Additionally they had the fail-safe in place, which also required a human to be present and make a decision.
If the Swan was teleported away, it would also explain why no one got hurt, and why Desmond (who was immediately atop whatever mechanism caused all of this to happen) was exposed to the massive amount of radiation which dislocated him in time. After all, violating the first three dimensions suggests skipping up to number four wouldn't be all that taxing to a massive energy source.
3) It's possible the fail-safe's last instruction was to send a message to someone in Dharma. I have no proof of this, but it seems both practical and plausible to notify the head honcho that the fail-safe was just executed. I mean that's serious business right there.
After watching the finale of season 4, there is a possibility that the fail-safe actually moved the island, as there was the same purple colour in the sky as when Ben turned the Frozen Wheel
Kelvin and Desmond's Conversation
The conversation between Kelvin and Desmond is almost entirely euphemisms. Notes:
Perhaps "the only other way out" refers to "out of the experiment"
Not necessarily the station, but perhaps the reason the scientists are on the island goes away.
The machine's function is to generate electromagnetism specifically for this unique location. It may be shaping the field, or it might be utilizing it like a power generator.
At the end of the initial fail-safe scene, Kelvin refers to a water dam. This could be a casual parable reference, but dams are also used to provide hydroelectric power. Later, as The SwanCountdown Timer has reached zero and Desmond is about to go under the flooring towards the Fail-safe, he tells John that he is going to "blow up the dam".
Kelvin didn't let Desmond finish his sentence, "Why makes us do it, push the button. If we could just---". Kelvin thinks Desmond is suggesting going ahead with the failsafe, and pre-empts him by questioning his courage. However, perhaps Desmond was about to say "if we could just automate the process somehow then we could leave." Why the venting of the magnetic energy is not an automated process, requiring the push the button procedure remains a mystery.
An automated procedure would run up against the bad luck generated by the numbers. If a machine tried to automatically enter the numbers, it would probably have a series of mysterious failures.
There is nothing suggesting that only machines run up against the bad luck associated with the numbers. Previously, we have seen humans suffering from the bad luck as well.
They probably knew that humans suffering from bad luck cannot die themselves from the bad luck. Computers would probably just fail trying to type the numbers...
Possibly DHARMA expected (or hoped) the numbers would change at some point?
Probably because in the event of a computer error, a person would have to be there to use the fail safe. If a computer were automated it could fail, and thus cause a massive system failure. As for the Numbers, who knows.
When turning the key, Desmond created 'save point' of the universe, similar to a computer. When the sky turned purple, the universe backed up the original copy so that the survivors could 'return' if they want to. It could explain why the Oceanic Six want to return so badly, perhaps Desmond still remains the key to undoing this. This could be why Charlie acted so strange after the implosion and why his ghost persists in bothering Hurley. If they return to the point of the fail-safe, Charlie will live and they will never be rescued.
the fail-safe is the hydrogen bomb. Jack is unable to use the bomb, but DHARMA finds it and uses it to neutralize the anomaly.
Radzinsky was murdered by Kelvin because he was tired of pushing the button and wanted to use the fail-safe. Kelvin was afraid of the results and killed him, later claiming it was suicide.
The Hydrogen Bomb
The fail-safe is the bomb. The "first time" through history the bomb didn't detonate after Jack dropped it. Turning the key detonates the bomb, neutralizing the electromagnetism and sending Desmond through time. In the second pass through history, Juliet (the variable) detonates the bomb.
Preventing the MiB's Escape
The Man in Black's idea of how to get off the Island is to cause a massive buildup of all the electromagnetic energy which would either result in the destruction of the world or his release into the world. In Across the Sea, he tells Mother that by channeling the light and water (The Source), he can get off the Island. By channeling, he means focusing it. If there is a big enough concentration of it, then all men would finally be able to experience the light as he has.
Desmond's one purpose in life was to push the button. To Dharma, all this did was slowly bleed off the electromagnetic energy buildup. Unbeknownst to them, they were preventing the escape of the MiB. John Locke, having been influenced by the MiB at some time prior to the activation of the fail-safe, destroyed the computer. If it were not for the fail-safe, the electromagnetic energy would have built up to this critical level, hence why the producers say that Desmond's turning of the key prevented a potential global catastrophe.
Fail-Safe Triggers Incident Time Jump
The key to understanding the fail-safe may lie in analyzing parallel situations.
Charlie's Fate: Charlie is destined to die, his death is inevitable. However, Desmond is successful at saving Charlie's life on several occasions, delaying Charlie's inevitable demise until the time of his choosing, a time when that demise would be more worthwhile than merely drowning or being struck by lightning. His death HAD to happen, Desmond merely delayed it until it could serve a purpose.
The Frozen Donkey Wheel: We see the Frozen Donkey Wheel set into a wall with a bright white light emerging from behind it. When the wheel is turned, the Island and/or it's inhabitants move through time while the person who turned the wheel is ejected from the Island into the desert of Tunisia. The wheel was built by man to facilitate the manipulation of the Island's energy and achieve travel through time and space. Ben Linus describes turning the wheel and moving the Island as dangerous and unpredictable, a measure of last resort.
The Kahana Bomb: once Martin Keamy's dead-man switch was triggered there was no way to stop the detonation of the C-4 bomb on board the freighter. The trigger was activated, the bomb HAD to detonate. What they could do was freeze the bomb, effectively delaying the inevitable detonation until a more opportune time.
With those situations in mind, consider the circumstances surrounding the detonation of Jughead in 1977. Juliet triggers the bomb, meaning that the bomb must explode. However, as Faraday indicated, detonating the bomb would neutralize the pocket of energy and thereby eliminate the circumstances leading to the crashing of Flight 815. This would create a paradox, as negating the crash of Flight 815 would also negate the detonation of Jughead in the first place. The bomb has to explode, but yet it also can't explode. Therefore, the real purpose of the Swan station was to essentially delay the exploding of Jughead until a more suitable time, namely after the crash of Flight 815, since once the plane has crashed it no longer matters if the energy pocket is negated. Similar to Charlie's death and the Kahana bomb, the inevitable could not be avoided, but could be postponed.
This was facilitated by initiating a time jump through the turning of the failsafe key. Much like the donkey wheel, the failsafe mechanism was a man-made device designed to manipulate the island energy to facilitate time travel. Like the Frozen Donkey Wheel, the failsafe mechanism also appears to have a bright white light eminating from behind it. Turning the key brought about phenomenon very similar to that of the time jumps brought about by turning the donkey wheel, namely the blinding white light and loud humming sound. And in much the same way as the turning of the donkey wheel ejects those who turn it from the Island, turning the failsafe key seemed to eject Desmond, Charlie and Eko from the hatch.
So when Desmond turns the failsafe key, he initiates a time jump which has two effects. It transports the Losties from 1977 back to their proper time, and transports the on-the-verge-of-exploding Jughead core from 1977 to 2004 at the point when the key is turned, neutralizing the energy pocket at a time when it no longer impacts the timeline. We see that Juliet was successfully transported to 2007 in the split second between the time she triggered the Jughead core and when it actually detonated. We know this because she was still alive in the Swan wreckage instead of blown to smithereens by a nuclear explosion. So if Juliet could be transported through time at the exact point of explosion, it stands to reason that the bomb itself could also be transported through time at the exact point of explosion.
In the end, Desmond's activation of the failsafe initiates the course-correction which avoids a paradox and "fixes" the timeline in much the same way as Eloise's refusal to sell Desmond the engagement ring initiates a course-correction.
It is likely that the DHARMA Inititative built the failsafe based on the construction of the donkey wheel underneath the Orchid Station. Like the donkey wheel, turning the key was seen as dangerous and unpredictable and a measure of last resort. The DHARMA people likely had no idea what would happen when the key was turned, only that it would manipulate the Island energy and facilitate time travel of some kind. In the event of a system failure at the Swan Station, turning the key and initiating a time travel event would present a last-ditch attempt to avoid an impending cataclysm. In this case, it offered the timeline an opportunity to correct itself. Since Jughead couldn't detonate in 1977, the failsafe allowed time to course correct by detonating the bomb in 2004 instead.