I didn't understand first either. I first discovered these playing around with Rancher which would use xip.io for the same thing.

The point is some protocols require you to actually resolve a domain name. For example, if you set up a vhost or reverse proxy with Apache or nginx, it will use the domain name to figure out what vhost you were trying to access. When you request a page like google.com the browser resolves that to an IP address, but it sends google.com with the request.

So say you have a reverse proxy at 1.2.3.4. You could make two vhosts: site1.1.2.3.4.backname.io and site2.1.2.3.4.backname.io and it would just work from any browser on your network.

You can do this locally using the hosts file before you set up your DNS for real, but a service like this means you don't even have to do that. Useful for quick experiments.