That sounds a bit like it conflicts with the actual job of the LLM.

You're right. But it's designed in such a way that it only biases the choice between the statistically most likely candidates, so it's not forcing a choice to a less optimal token. It's biasing the choice between equally optimal tokens. So it doesn't really affect the quality of the LLM's output.

And the resulting watermark would be way too fuzzy to be actually useful for flagging anything as AI-generated.

It's actually not that fuzzy. It's the statistical equivalent to randomly guessing a 256-bit encyrption key. If you consider the algorithm operate on trigrams (sets of 3 words), then a 1000-word document contain 998 trigrams. Let's say at each trigram the model has a choice between 16 equally likely candidate words, which is usually chosen at random according to the model temperature, now is also biased by the watermark hashing function.

The statistical likelihood of randomly making the same 1/16 choice as the watermark 998 times in a row is so extremely small it's essentially impossible. Even if you rearrange the document, cut large portions, paste in other portions, rewrite some, you're likely to leave in enough matching trigrams to make a statistically solid determination.

The main requirement is the text needs to be long enough... just a small sentence or snippet won't be enough.

Having said that, it's not that hard to defeat the watermark once you know how it's done. If you know it operates on token trigrams, then you need to rewrite the document at the trigram level to break up those relationships.

Are they just trying to check a box on some compliance checklist?

Actually yes, this has been prompted by a new EU law requiring AI companies to make LLM output identifiable so that people have a chance at knowing what is generated/fake content.