Understanding it
A regular link passes a form of endorsement. nofollow, sponsored and ugc let you tell Google why a link exists when it is not an editorial endorsement.
Google asks for sponsored on bought or paid-partnership links, and ugc on links in comments or forums. nofollow covers other cases.
For an earned backlink, a nofollow link passes less value, but can still bring visits and brand awareness.
A concrete example
Illustrative example: a sponsored article
A brand pays a media outlet for an article linking to its site. The link is published with no attribute, like an editorial link.
The outlet adds rel="sponsored" to the link, in line with Google’s rules. The article stays online, with no risk of a paid-link penalty.
The common mistake
Making every internal link nofollow
Adding nofollow to internal links to “keep” value cuts paths that help crawl your own site. Keep these attributes for outbound links that are paid, promotional or unvetted.