3 rail O was developed as a toy train, Joshua Lionel chose 3 rail because it made wiring a lot simpler, no problems with reverse loops for example. The trains were representative of real trains for the most part, again designed for kids to use (well, in theory....).
2 rail O emerged I believe in the 30's, when I would assume adults wanted to have more realistic trains, it was when HO started growing in popularity. For engines from what I have read people converted Lionel 3 rail engines to 2 (Frank Ellison used outside third rail, still not prototypical), and there were a small group of manufacturers who started offering 2 rail O running 12v DC like HO, offered rail.
3 rail in terms of size of market has dominated 2, even as 2 rail scale did grow over time, in part because especially before the 1960's, Lionel 0 was a mass market product. Even after Lionel went into decline it still was bigger than 2 rail, even as more manufacturers started producing in 2 rail. In recent decades 3 rail changed, it went from the semi scale to toylike post war mode to being scale models, a lot of people got into 3 rail as scale modelers (obviously semi scale is still out there), and of course the entry of MTH and Atlas also made 3 rail bigger.
2 rail 0 is still out there, it is of course much smaller than HO or N , and it is also one of the reasons that 3 rail O scale modelling dwarfs it, and that is space. 3 rail O, even scale, has compromises to make it run on tighter curves, things like truck mounted couples, longer drawbars on engines, blind drivers (non flanged), are compromises to allow scale size but run in relatively smaller spaces. 2 rail O scale generally requires larger radius curves that many people don't have the room for (and that is a generalization, even 3 rail O scale can require larger radii to work or look good, like O36 radius/O72 diameter, but that would likely be larger in 2 rail scale for a similar engine. (it is also why for all the scale equipment, a lot of people stay with smaller scale 3 rail or semi scale, because they don't have room for larger curves)
2 rail scale as I mentioned is 12v DC, it operates the same way as HO does. In terms of command control it has one big advantage, most engines in 2 rail O that support command control use DCC, the industry standard, there is no bifurcation like 3 rail (MTH made engines that could be switched from 3 rail to 2 rail, the command control system supported DCC or DCS, MTH's own system), where Lionel and MTH had 2 different, incompatible systems for the most part. 2 rail scale also has the polarity issue with reversing loops, but these days thanks to automated polarity control you no longer have to manually control the rail polarity to prevent a short.
Basically comes down to what drives a person, 3 rail semi scale allows you in relative smaller spaces to be able to run a variety of equipment on tighter radii curves, but it won't be as scale appearing; 3 rail scale is less of a compromise, the equipment is more scale appearing, looks more realistic, but of course it has the third rail, and it employs other compromises like truck mounted couplers, drawbar lengths, blind drivers, removed steps and such on overhangs to allow tighter curves.
2 rail scale like any scale equipment still has compromises, but they are a lot less, 2 rail scale has body mounter couplers, has fine detail not possible on 3 rail scale always, has small flanges to allow more scale track in terms of height .
Proto 48 is sort of the ultimate, O has one factor that goes across O 3 rail and 2 rail, the gauge works out to 5' scale, when prototype is 4' 8 1/2". Proto 48 means track that is gauged properly, that the ties are spaced to prototype spacing, and generally is using code 100 track as well.
Price is also a factor, semi scale tends to be cheaper, significantly so, scale equipment 2 or 3 rail is more expensive, so it is another compromise, budget plays into it, too.
