ADAM can be genetically manipulated to produce cells that would not normally be present in the human body. It acts like a seemingly benign form of cancer, destroying native cells and replacing them with the unstable stem versions. While it is this instability that gives it its amazing properties, it is also what causes the cosmetic and mental damage to people who use it habitually. In the end, the instability of the stem cells means that the user will have to take in more and more ADAM just to remain sane and healthy.
The problems caused by ADAM abuse among the population of Rapture were exacerbated by Andrew Ryan's Free Market beliefs. His hands off approach to running the city meant that there was no regulation of ADAM, and no prevention of its side effects. By the time the Rapture Civil War began and Ryan was running the city with an iron fist, the damage had already been done.
ADAM was discovered by Brigid Tenenbaum in a sea slug that had bitten one of Rapture's dock workers and healed his long-crippled hand. However, the sea slugs alone could not provide enough ADAM for experimentation and work, let alone marketing. But when the slug is embedded in the lining of a host's stomach it was discovered that, through regurgitation, they could have twenty to thirty times the yield of usable ADAM.
EVE is a modified version of ADAM which allows the use of Plasmids. In its liquid form, it glows bright blue and can be seen in the dark.