This technology actually has historic roots. During World War II, aircraft engineers needed a device to combat detonation -- premature ignition that could damage engine parts -- in piston-powered fighter aircraft. Their solution involved injecting a mixture of water and alcohol into the air intake, cooling the engine and helping maintain proper fuel ignition.
After the war, hot-rodders adopted water injection for their own high-performance engines. The technology showed up on a handful of successful race cars, but it has declined in use as advanced materials, engines and fuel technology reduced the risk of detonation.
Detonation, like misfiring, is not a problem most drivers of modern cars will ever experience. It typically only occurs in cases where a driver runs a highly modified engine (which often experiences much higher than normal internal pressure) on low-octane gasoline. In a normal vehicle driven under normal conditions, the scenario that invites detonation is highly unlikely. Water injection may be a useful tool for specific high-performance situations, but it's not a particularly useful or effective device for improving your daily driver's fuel mileage [source: RallyCars.com].