The term "Cloud" came about from network diagrams like this:
The Internet is the Cloud. What it really means is someone else's computers and data center outside of your internal network and accessible over the Internet.
Apple iCloud does several things. It is used as a sync mechanism to sync your email, text messages, passwords, photos, music, etc. between devices such an iPhone, iPad, and Mac. It provides storage for mobile device backups and mobile Apps on your iPhones and iPads. The Mac can access the storage. You are granted 5GB of storage for free but if you pay $1/mo you can get 50GB's of storage and for $3/mo 200GB of storage. If you have multiple family members you can each have your own iCloud account and then share content and purchases, HomeKit automation, etc. The FindMy service runs in the Cloud as does the AirTag tracking. You can login to iCloud's website to manage your devices if you sold or gave one away you can remove it from your device list allowing the new owner to activate the device that is protected with Activation Lock. http://icloud.com.
There's more iCloud can do, many little subtle things that all add up to wonderful Apple product integration and cross device functionality. Features like handoff, etc.
It's definitely worth paying for iCloud storage as it is so inexpensive. Eventually that free 5GB of storage is going to cause a problem like not being able to backup an iPhone to iCloud, or filling up your storage with photos and text message attachments.
You don't have to use iCloud you could use Google services or Microsoft services instead. It's just that iCloud enables more interoperability than their competitors when dealing with Apple devices.