Materia is a remnant from the 1.0 system, and likely wouldn't exist at all if it wasn't already baked into the system.

As it was, it provided an easy way to keep crafters busy by making crappy items that got broken down into materia that was slotted into better items. Like everything else that tends to be involved in the game economy, however, it's somewhat been phased out and thrown into the 'optional' area of item enhancement.