depending how how the plugin does it internally this can be quite an intresting way of adding security.
essentially this thing misuses HOTP big time, by calculating the next however-many OTPs needed and forms them together with the master pass to encrypt the database.
but of course when you have lookahead active (and you really should, especially on a nano) it generates a few more sequences of keys in case you incresed the counter accidentially.
The idea behind it isnt bad, although obviously keepass needs to store the seed (shared secret) in the database to allow for re-encrypting it.
the keechallenge plugin works on the same premise: hashing a shared secret with some kind of challenge (the counter in HOTP), but this plugin is actually safer from a few standpoints.
1) it provides a 160 bit output of HMAC-SHA1 instead of "just" of log2(10^(6*x)) bits (x is the number of consecutive OTPs you select, 8 consecutive OTPs would you get just to 159 and a half bits of length)
Simply saying, you need to tap MUCH less for the same security Level, and while the OTP plugin could probably be configured to use a ton of OTPs for even higher security, with modifications the Challenge-Response plugin could also run multiple challenges throwing the number of bits through the roof, with again just an eighth of the needed taps (and no concern of mis-tapping and not getting the proper sequence).
2) as the challenge is provided from the database, we dont need to worry about accidentially touching the key or lookaheads, which means we dont need to lower the security by allowing multiple second factor solutions to get in.
Simply said number 2 means the Yubi only has the Secret and the DB has what could be called the "state" of the challenge, while in TOTP, the Yubi has both the state and the secret needed to decrypt the DB and the state changes everytime you touch the key, meaning you would need to account for multiple states.
although obviously the shared secret still needs to be stored in one way or another inside the database (unless you don't change the challenge at all, but that's reckless).