How to implement pretty URLs in AEM? (URL parameters but without using ?parameter-here=xxx)

You'll need to use a sling servlet with a selector. Your selectors will be firstname, lastname. Your sling servlet annotation will look like this:
@SlingServlet(resourceTypes = "myBrand/components/pages/myPeoplePageType", selectors =

{firstname, lastname}

, extensions = "html”, methods=”GET”)

Your URL below:
http://www.myhost.com/people.firstname.lastname
will invoke your servlet and pass current page path along with other parameters. Servlet would be resolved through selectors & resource type.

Then you will need a dispatcher rewrite rule that will take /my-page/john.smith and transform it into /my-page.john.smith. You can test your /my-page.john.smith on your author instance. But for the pretty URL, you'll need your dispatcher set up. Or you might be able to do this URL mapping (under /etc/maps) as a regexmap (https://sling.apache.org/documentation/the-sling-engine/mappings-for-resource-resolution.html#mapping-entry-specification), in which case, you can test it in your author.

https://forums.adobe.com/thread/2325530
http://www.aemcq5tutorials.com/tutorials/sling-servlet-in-aem/
https://helpx.adobe.com/experience-manager/6-2/managing/using/seo-and-url-management.html (Look at sections - "Using Sling Selectors" and "Sling servlets (one level down)")

Yes it can be tested locally. no publish no dispatcher required

You can add a sling mapping for making your pages load with URL 1

You can perform a regular expression matching which matches all url with extension .smith and redirect internally in AEM to /content/my-page/john

Refer to https://sling.apache.org/documentation/the-sling-engine/mappings-for-resource-resolution.html#mapping-entry-specification

Your first URL goes towards selector implementation in AEM,

Look at the complete guide here https://helpx.adobe.com/experience-manager/6-2/managing/using/seo-and-url-management.html