Bitcoin is not backed by anything. CPU cycles are used to ensure the security of the system.

Low transaction fees are nice but why not use something like Dwolla which is dollar denominated?

That's like comparing eggs to chickens. Bitcoin is more than just a transaction clearing house, but also a currency that is completely separated from the control of governments and traditional banking institution.

The advantage of bitcoin is that anybody on the planet can use it. I can send you bitcoin just as easily across the street or halfway around the world. Bitcoins cannot be frozen as easily as your bank accounts can be frozen. There's also the fact that bitcoin cannot fail due to one single company.

Not quite sure what the appeal is here?

It appeals a lot to technogeeks who happens to also be libertarians, people who worries about economic policies of governments, and so on.

But bitcoin in my opinion can facilitate greater efficiency in the world economy by making it easier to transfer capitals across border. That alone is valuable.