The coordinate range of the RGB curves is
[0, 1]. The RGB values in Blender are always in
[0, 1] range, where 0 is is no intensity and 1 is full intesity of the color channel. Otherwise you are correct. The curve represents a function which maps input values (x axis) to output values (y axis).
The vertical curve (D) does the following: It manipulates the combined color values (note that the C is checked at the top of the RGB Curves window). This means the curve is applied to all channels individually. It maps all R, G and B values that are smaller than 0.5 to 0 and all that are greater than 0.5 to 1. So the color (0.8, 0.6, 0.2), a light ochre, would be mapped to (1.0, 1.0, 0.0) which is pure yellow.
If you apply this curve to an image the R, G and B values of every pixel are mapped to either 0 or 1, resulting in
2³ = 8 possible colors. Reducing the number of possible colors in an image is often called posterization.
If you want posterization with more than eight colors you could add more steps to the curve. Here is an example of a curve that will map an image to
3³ = 27 colors.
Apart from the combined channel you can of course also manipulate the separate R G and B channels by clicking on the on the corresponding button on top of the RGB Curves window and modifying the curves of the channels. The curves of the separate channels are applied AFTER the curve of the combined channel.