This is the spacer that sits inside the rear wheel. It is also the inner bearing race for the needle bearing that carries much of the rear tire load. This photo is of the "early" style. There is a distinct "heatline" that separates the bearing surface from the remainder of the spacer.
If your spacer has this heatline then it might have wear like is shown or may develop wear in the future and should be replaced with the fully hardened, hard chrome plated spacer available here.
If your spacer does NOT have the heatline and is a uniform matte-silver color all over, then it is the late style and is unlikely to ever wear out if kept greased.