As a tech demo it suggests many benefits. Most of the answers here seem to be concentrating on the negative impacts of what happens when you bring the device closer to yourself, thereby decreasing the fontsize, but I believe the benefits of this system are when you come at it from the other direction - how to present content to users viewing it where their eyes are further away. (In my testing the fontsize never drops below 20px, well above the minimum suggested value of 16px (yes, px isn't really the ideal method for specifying text size for accessibility, but it's all this demo displays currently).
The default mode of the demo is Realtime. As a demo of how the system works this is the default setting, but is unlikely to be actually useful over and above a tech-demo to show how it works. Practical uses are limited here.
The more versatile options are the other two settings; OnLoad and Breakpoints
Detecting how close the user is to the screen when the site loads means the site itself is being more intelligent and can cater for how best to initially display the site / app to the user currently viewing it - for instance if this is being viewed on a smart TV where the user sits further away from the TV than a laptop user would do so it means the font-size can be larger so it is more visible from a distance.
Operating OnLoad rather than in realtime means it's less 'juddery' and just opens at a particular setting and stays as such while you use the site / app. However, the drawback of this is that detecting OnLoad means it's going to override the default font size setting put in place by the user.
Operating at set breakpoints is more in-keeping with the Responsive Design philosophy. In fact it is already in current use, albeit without camera detection in this way. For example informationarchitects.net discussed this and have also implemented it on their site - viewing the site on larger devices shows increased font-size and linespacing. As they discuss:
The size of your body text doesn’t depend on your personal preference. It depends on reading distance. Since in general computers are further away than books, the metric size of a desktop typeface needs to be bigger than the sizes used for printed matter.
I would suggest one possible use of the Breakpoints feature is that it uses the default fontsize as already determined by the user onload (such as whether they browse with increased fontsize for accessibility purposes) and then use that as the default. Once the user gets closer / further away then start detecting the proximity and adjust the font size accordingly.
Adapting the display of your application based on the screen dimensions it is viewed on is one thing, but that doesn't take into account how the user is actually looking at the device. If we can take other criteria into account while presenting content to users then it is very possible that we can find new and improved ways of doing so.
As the InformationArchitects.net article states:
“Not everything always works in your favor when you design for the screen. Interaction design is engineering: it’s not about finding the perfect design, it’s finding the best compromise.”
Sure, this camera fontsizing item isn't perfect, it's clearly only a tech-demo (all the Lorem Ipsum is a bit of a clue there) but really it's trying to think about how the user actually views the web these days. We can't always assume everyone holds their iPad at exactly the same distance from their face - some hold it like a book, some rest it on their lap, others leave it in a cradle on the table. By catering the fontsize to the user as well as the device properties is very much about putting the user first and not just assuming everyone uses everything in the same manner as everyone else.