Purchasing gems – what currency is used

Level downscaling will downlevel your character to the maximum allowable content level for that area.

So this will affect all your primary stats, Toughness, Vitality, Power and Precision. When you open your hero panel you'll see your main stats on the right in white, and next to them on the left you'll see your 'effective' stats in green. These are the numbers that you're going to be using. As these numbers are changed this will effect your damage, hp, crit chance, etc.

The thing with you feeling more powerful is that you still have the higher level gear. So for example, if you are lv30 you might have an amulet with +11 power. You go to a lv10 area, and fight with players who at lv10 can't even equip an amulet. Now I'm assuming, but let's say that the downscaling is a %, then your overall stats will be higher, meaning you'll be stronger at lower level because of your better gear.

You are by no means at all invincible, but you'll certainly fare a little better due to having more or better gear. The real killer is that as a higher level you will have traits and skills available which lower levels will not. You can also use your Elite skill still, if you've unlocked it. So there are some advantages to revisiting the lower level areas.

I think most people's experiences of this will be doing each of the race's starter areas once they've finished their own.

You can read more on the wiki, http://wiki.guildwars2.com/wiki/Dynamic_level_adjustment

Character level adjustments have a limit, however. The level-adjustment system won’t let a level 1 character go head-to-head against a level 80 character with much chance of victory—a level 80 character is still going to have more bonuses on their gear and access to a full complement of utility and elite skills that players just don’t have at lower levels. This is not to say that the high-level character will one-shot the level 1 player, but they will have a clear advantage.

http://www.arena.net/blog/mike-ferguson-on-guild-wars-2-world-vs-world

Edit
Since Jan 28th 2013, the downlevelling has changed. https://www.guildwars2.com/en-gb/news/dynamic-leveling-adjustment/

Take a look at the Wiki on the page Mystic Forge. It will tell you where the forge is, how it is used, and some predictable recipes. The forge lets you do two things. First you can create recipes to craft other items like consumables, weapons, or armor. Second, the forge can be used to create better crafting materials of one type higher.

The examples the wiki gives are as follows:

Common Crafting Material Promotion

Common crafting materials can be promoted to a small pile of higher tier materials with the following formula. The tier of dust needed is equivalent to the tier of the wanted product. So, if you are hoping to create Orichalcum, a tier 6 common material, you need to use Crystalline Dust, a tier 6 dust. If common crafting material B is one tier higher than common crafting material A, then:

10-50 Crafting Material B = 250 Common Crafting Material A (i.e. 250 Mithril Ores) + 1 Common Crafting Material B (i.e. 1 Orichalcum Ores) + 2-5 Dust A (i.e. 5 Pile of Crystalline Dust) + 5 Philosopher's stone

In that example: That recipe will produce 10-50 Orichalcum Ores

Armor boxes and armor satchels

Recipes can be created using the Mystic Forge. They will allow you to craft armor boxes and armor satchels, which will in turn give you every piece of an armor set.

Armor set recipe

Ingredients

5 Bottle of Elonian Wine

20 Arcane Crystal

50 Mystic Coin

1 Armor item

Mystic coins seem to be a common item needed for Food Trays, Weapons and Armor. Also look at this page for current recipe research.

You can see this in action with this video on how to make a Giant Chocolate Cake. Details are in the video summary.