Good explanation. One could add that in theory you can have as many levels as you want, but since electrical signals (as basically all signals) aren't exact, the on/off system makes it very easy and quick to filter out noise.

There isn't really a point in using a specific number of levels, like 3 or 4, simply because it isn't very efficient in practice, but if you use the raw signal directly with "all the levels", you end up with an analog signal. As long as you can live with some noise (e.g. for storing audio/video, where you wouldn't hear/see tiny differences), analog signals are a very efficient way to store and transmit data, but unlike digital ones they are likely to degrade over time (or distance, if we talk something like radio waves). Like, a video tape might lose its magnetism over time and become noisy, while a DVD always works perfectly until it is so damaged/scratched up that it can't be read at all anymore.