How a Distortion Pedal Works
The distortion pedal takes the raw incoming signal from the guitar, and intentionally boosts it to the point where the top and bottom of the sound wave "clips", causing the sound to distort (try cranking the volume on a cheap portable radio for a dramatic example of this clipping). Although this degrades the signal, which you'd imagine would provide an inferior sound, in practice, when handled carefully this distorted signal can sound pleasing.
A Brief History of Distortion
Distorted guitar sounds began making their way into recorded music in the early 1950s, although these sounds were not being created by effects pedals. In most cases, these distorted guitar sounds were created as a result of tubes coming dislodged from amplifiers or from ripped speaker cones. In scenarios where the performers liked the resulting guitar sound, they would often attempt to recreate these hardware problems in order to preserve their newly-found tone.
By the mid 1960s, the first effects pedals aimed at creating distortion began to circulate. These early distortion units are now referred to as "fuzz" pedals. As time progressed, the type of distortion guitarists preferred evolved - from The Kinks early use of distortion (via a slashed speaker cone) - to the fuzz-based distortion used by Jimi Hendrix (the "Dallas-Arbiter Fuzz Face") - to the thick chunk of Metallica's Kirk Hammett (ADA MP-1 with an Ibanez Tube Screamer).
The following pages briefly explore the three basic types of distortion effects on the market today.