"Passive mode" means that the computer running Coda will make network connections to the FTP server. Conversely, in non-passive mode, the FTP server will make network connections to the computer running Coda.
If the computer running Coda is behind a network firewall, or NAT router (such as a typically-configured AirPort Base Station), passive mode will usually be required.
Passive mode is enabled by default, and need not be turned off unless you are having problems connecting to, or transferring files on an FTP server.
If both computers are behind firewalls (or NAT routers) it may be impossible to get a file listing or transfer files. Talk to your server administrator if you have tried both passive and non-passive mode but still can't get a working connection.
Passive mode is used only in FTP connections. It is not relevant to other protocols, such as SFTP or WebDAV.