An Apple Watch jailbreak was demoed at DEFCON this week by Max Bazaliy, security researcher at Lookout. watchOS 3 was the jailbroken operating system demoed on stage during a presentation. Max explained the different bugs and attack vectors used to make the jailbreak possible. While Max Bazaliy showed off a number of documented attempts at jailbreaking watchOS, the successful one includes running SSH on the Apple Watch. The jailbreak provides full access to the Apple Watch filesystem and the SQLite3 databases for Messages, Contacts, Call History and Emails. A jailbroken Apple Watch also creates the possibility of jailbreaking an iPhone with it, however, it is only a theory and was not part of the demo.
A jailbreak for Apple Watch could allow developers to create custom watch faces for it, create customized app launcher layouts or even allow users to downgrade watchOS so it can work with older jailbroken iOS version.
Just because a jailbreak has been demoed does not mean that it will be released for all users. There are a number of concerns before that could happen. Normally, developers have to package the jailbreak so that it works fine with most variety of hardware. They also have to make sure that it does not include any files that might bring up legal issues. A jailbreak also needs to have a tool like Cydia so that users can download and install tweaks or extensions to take advantage of it. Else, what is the point of the jailbreak. Lastly, the biggest issue with jailbreaking an Apple Watch is the issue with restoring it if it gets bricked. iOS devices can easily be restored in case something goes wrong, by putting them into DFU mode, connecting them to your computer and restoring iOS. The same cannot be done with Apple Watch. If you brick it, you have to send it back to Apple to get it fixed.
Perhaps, it might be a good thing that users have not been given a jailbreak to risk jailbreaking their Apple Watch. If you are interested in the inner workings of how the jailbreak was done, the presentation slides are available to view online with all the technical details.