It makes phony dragon footprints.
The Decoy was built by the Great Gummis to frighten away intruders by leaving behind dragon footprints everywhere and since Gummis and Dragons were good friends, Dragons allowed to have their feet modeled for the mechanical dragon foot that would make the prints.
After the Gummis left the Dragon Decoy was left behind in storage at Gummi Glen until it would be rediscovered by Zummi and Tummi Gummi. Tummi accidentally switched it on and started hoping all around the forest out of control, spreading fear of a Dragon to Sir Tuxford and Unwin.
When Tuxford began a dragon hunt, Tummi used the Dragon Decoy to lure them away from the actual dragon. He jumped out moments before Tuxford and his men destroyed the Decoy by dropping a huge boulder onto it.