It allows any nodes to validate the validator, they can call out anyone out by doing their own computation for the transaction. If they find a bad actor the stake that bad actor put is lost and goes towards the "whistle blower" node in their wallet.

It is based (on my reading of it) on the notion that there are many more good actors then bad. I wonder if you can get in a situation where someone spams bad actors and fudges all the transactions.

The validator that proposes the block with the slashing in it gets a small reward, while the rest is burnt. There are dedicated slashers on the network that observe attestations and block proposals for violations. They can either selfishly keep those observations until they can be included in a block, or broadcast them to the network so whoever is up next for proposal can slash the misbehaving validator. The whistleblowers themselves (altruistic slashers) get no reward, only the validator including it in a block does.