Would there be any issues with only using 2 keys on this?

They include spacers so I’m sure you can put them in between the keys and on the outer end as well if it’s too loose. I have 4 keys on mine without the spacer as it was too tight and it works fantastic. I’ve had mine for a while now. You should be fine.

Please explain to me why people are paying $20 for a piece of rubber to hold their keys?

Because they are tired of all the keys being loose and jingling and not being compact. Some these products keep keys in a single file and compact. So when you when you go for a walk, for example you actually hold your keys in your palm if need be. Or put them in the tiny pocket of your leggings.

I received a bag of spacers with this. What are those for?

It’s to fill the space between the keys if it’s too loose or you don’t want them to rub on each other and remove paint (on painted keys). Mainly protection but I use mine without as 3 standard size and 1 large key was too tight and fat with spacers in between.

Does this come with washers to help the keys slide against each other smoothly?

Mine also came with 8 washers. With those between keys, they hold but can also rotate out easily. However, with them between each key, I only fit ~3-4 keys.... Couldn't fit 5.