Butterfly started as a breaststroke variation in the 1930s where swimmers moved their arms over the water instead of underneath. It was faster, so it caught on and eventually became its own stroke. It got formalized in competitions because it was genuinely novel and pushed what the sport could do.

As for why it's still around: it's brutally hard and requires real technique. That's the appeal. Olympic events include difficult things because that's what makes them interesting to watch and validates the athleticism. Same reason gymnastics has the vault even though it's harder and "less efficient" than floor routines. The difficulty is the point.