Prerequisites: Any type of wall, can only be built in cities (available only in Annual Specials)
Watchtowers are an improvement of walls. They provide a defensive bonus for defenders, similar to walls. They can only be built in cities.
Watchtowers are not separate buildings, they are an improvement of walls. While watchtowers cannot be directly targeted by enemy rams or catapults, if the walls are destroyed, the watchtowers are destroyed as well.
You can upgrade watchtowers up to level 20, regardless of the level of walls.
Each level of watchtowers adds additional 1% of defense bonus to all units defending the city. This is a flat bonus added separately from the wall bonus. This means that for example on level 10 it increases defensive units strength by exactly 10%.
This effect was changed compared to Tides of Conquest
In the Tides of Conquest, 2021 Annual Special, watchtowers worked differently. Instead of defense bonus, they were improving Rally Point's ability to see incoming troop types.
Each level of watchtowers improved the Rally Point bonus by 3. For example, if Rally Point was on level 20, it allowed you to see unit types of any attacking army of fewer than 20 units. Each level of watchtower increased this number by 3. So watchtowers on level 20 together with Rally Point on level 20 allowed seeing unit types of any attacking armies of less than 20+20*3=80 units.
This effect doesn't exist anymore and was replaced with the defense bonus.
Watchtowers also increase the population of the city, without increasing its crop consumption, unlike regular buildings.