As I understand grounding means designating one node to be the reference node relative to which other voltages are measured.
No, this is not what grounding means. Grounding means making a physical connection from some part of a circuit to an external point of known and stable potential (commonly the earth, but not always), such that all voltages in the circuit are predictable relative to that known potential.
This can be done for safety, circuit protection, or to eliminate unwanted noise signals in the system.
To give a contrived example:
You could have a battery powered signal source like a microphone with preamp, feeding a battery powered amplifier. Suppose now you attach the microphone to your nylon shirt that has a static charge of 10,000 V on it. The microphone is now sitting at a potential of 10,000 V induced by the nearby static charge. It doesn't care of course, because it is isolated and floating and does not know what the outside world is doing.
Now suppose we plug the microphone into the amplifier, which is sitting on a desk and
not charged up to 10,000 V. As soon as we plug in the microphone there will be a voltage difference of 10,000 V between the microphone and the amplifier. This might be bad for the amplifier, since its input circuits are only expecting to see a few mV. The amplifier could get fried.
One solution to this is to establish a common voltage reference between the mic and the amp, so they are both sitting at the same potential. This is usually done with the shielding braid on the microphone cable. Both mic and amp physically connect their circuit grounds to the common braid and now both of them share the same ground potential.