Gmod 12 will only connect to the specific official toybox domains which were shut down in 2012. So the hosts file is what tells the game "toybox exists, but its at this IP now", pointing to Cloudbox.
If you use a pihole or any other custom DNS service you can do it that way too. Hosts file is just the most accessible method for most people.

In Gmod 13 (current Gmod) we've re-created all the toybox functionality from scratch and point directly to Cloudbox so all you need to do is use the Workshop addon, no hosts file stuff. But we can't do that in Gmod 12.