what exactly do the hubs do?

They lock the front wheels to the front driveshaft, so they can get power when in 4wd. Basically, you have two disconnects in this type of part-time 4WD system. You have the lever inside the cab, which disconnects the transfer case, and you have the hubs up front that disconnect the front wheels.

The advantage is, when in 2WD, the front wheels will free-wheel, and all of the front drivetrain (driveshaft, gears, axles, etc.) do not turn. With a flange setup, like the '05 Xterra, the wheels are permanently engaged to the front axles, so when you disconnect a the t-case, the front components continue to spin.