The current 7th gen iPod Nano that came last year is too big to use as a watch.
Lots of people are using the 6th gen iPod Nano as a watch, but it doesn't have any features that a true "smartwatch" should have and you can't install apps on it.
Personally, I think that a smartwatch should be designed as a "dumb" terminal to a smartphone, although maybe with an interactive display so that you could move between pages of notifications/time/calendar from different apps.
In other words, it should be an accessory to the phone. You should only need to install apps on the phone and those apps would push data to the watch whenever there is an update.
Such a smartwatch would have a low-power screen and would sleep most of the time to conserve battery. The iPod Nano can't do that.