Essentially, it's an online marketplace on which anyone can open shop as long as they are selling in one of three categories: handmade items (i.e. art, jewelry, pottery, furniture), vintage (over 20 years old), or supplies (beads, paper, yarn, etc.). The great focus is on handmade items, and you can find anything from a firepit for your backyard to a purse made from a hardcover Nancy Drew book to an original painting on gallery-wrapped canvas.
It is not an auction site; the prices are set by the seller. Just like Ebay, however, Etsy itself doesn't handle the actual payment, so once a sale is "completed" on Etsy, the buyer still must proceed with a payment method. Sellers offer a number of methods of payments, from PayPal to check to bank transfer (in Europe); most prefer PayPal (which has come a long way in recent years - you don't even need a PayPal account to use PayPal to pay with a credit card and the seller still won't have your credit card details).
There are some drawbacks: the search function is less than perfect, but still functional (the main catch being that if you wish to exclude things from your search, you must use the word "NOT" in front of a word, instead of a minus sign as you would on the Internet). And the features are not necessarily intuitive. Many have odd names and so you must explore them to figure out what they are (like Time Machine 2, which shows what has just been listed, and I think is the BEST way to get an overview of what's selling on Etsy, and Treasury, which is a great way to be introduced to new sellers and have someone else do the searching for the really cool items you might not find just browsing). If you're looking for something specific, the category list is probably the most basic way to find things.
Prices vary widely, so you can find something for any budget. And the quality of items for sale varies widely, too, sometimes even within one person's shop. But I think most people would be impressed at the way the average quality skews heavily in the direction of excellent, unbelievable, even awe-inspiring.
In short, Etsy is a fantastic place to do your holiday shopping. And although all prices are in U.S. dollars, it's not limited to U.S. residents; there are both buyers and sellers from all over the world. One of them might be your neighbor. And, with limitations, most people will ship all over the world too (the limitations mostly concern things like soap or perfume that might be prohibited in customs regulations).
If you're still wondering why you'd want to buy handmade, I'll answer that in an upcoming post. In the meantime, just go check Etsy out.