what does the 'debug mode' on Services actually do?
The debug mode is essential to test if your service is working correctly through posting the logs. You can see the logs in admin/reports/dblog.  These logs shows you if you are sending the appropiate format,  if there is any error, etc.  The logs  allow  you to see the output of the transactions. I have attached a image with some samples of the logs messages. As far as I understand that it is the only use for the debug mode in the services 3 modules. If it is not or this answer was not accquire please post a better explanation.

As you say it uses watchdog, so you can see internally what it is happening with your service. I have included the service code if you like to see the function yourself git service



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