Slavonic had one vowel i and Cyrillic gave it two letters, izhe and i, inherited from the Greek eta and iota. Neither could be dropped, because both carried numerals the system needed, so the tradition did what it did with every such pair and fixed the distribution by rule.
The rules changed over time and differed between the manuscript tradition and the printed church books. In the settled printed orthography the decimal i is written before another vowel and in a small set of fixed words, and izhe is written everywhere else. A reader who knows the rule can use it: an i standing before a vowel is a signal about the shape of the word that follows.
The best known application of the distinction is a pair of Russian words that were spelled alike except for which i they used, one meaning peace and the other meaning world. The pair was abolished with the letter itself in 1918, and a well known story holds that the title of a famous novel turns on it. The printed editions do not support the story, which is a useful reminder that a good anecdote about orthography outlives the orthography.
The general point stands: a distinction that no longer marks any difference in speech does not become useless. It becomes a carrier of information about etymology, about vocabulary and, in the hands of the people arguing about spelling reform, about who was educated and who was not.