The nofollow HTML attribute was originally designed to stop comment spam on blogs. Blog readers and bloggers were well aware of the immense problem.
Just like any other type of spam affects its community, comment spam affected the entire blogging community, so in early 2005 Googles Matt Cutts and Bloggers Jason Shellen designed an attribute to address the problem and the nofollow attribute was born.
Since then, the nofollow attributes usage has gone far beyond just blog comments. Web directories commonly use the nofollow to control outbound links. Free directory listings that are either not paid or are not reciprocally linked usually use the nofollow attribute. Since both outbound and inbound links are considered when some of the important search engines rank a page, the nofollow attribute is used to control the outbound links so as not to give away ranking.
Many of the newer SEO back-link checking scripts now include information on whether or not a website or blog is using nofollow on its pages or in its robots.txt file. This information is useful for site administrators that want to know which sites are giving them ranking and which ones are not. As Ralph Waldo Emerson once said Knowledge comes by eyes always open and working hands; and there is no knowledge that is not power. In this case the power lies in both using and knowing what other sites use nofollow.
Google suggests that paid listings should include the nofollow attribute so that ranking cannot be purchased and so page rankings stay true. Because most search engines use links to help determine the reputation of a site, they must consider paid links to be a way for site owners with deep pockets to circumvent the process. It makes sense but I doubt well see many sites that sell advertising include an attribute that will affect the links to their advertisers and therefore advertising dollars. Until Google finds a way to determine which links are paid, a very difficult task, the practice of buying links for ranking will continue.
The nofollow attribute in no way, affects the traffic that utilizes a link that carries the attribute, thats just common sense, but for many webmasters and bloggers a quality link is a two-headed and friendly monster. It benefits your site in both page rank and in traffic. Cut off one head and the monster looses half of its strength. That also depends on what is important to you and what your goals are. Both are important and in many ways they can work hand-in-hand. As we see more search engines adopt the ranking system its importance will continue to grow as well.
The nofollow attributes importance is evident simply because of the weight some SEO companies place on it when developing their back-link scripts. Just knowing if a site you are linking to includes the attribute when there is an exchange of links can only be valuable information. If you arent using the nofollow attribute when linking to a particular site, but they are, it may be an unfair trade. I say may because it depends on the page rank of both sites. Whats fair to one may not be fair to the other.
The best way to be sure that the use of the nofollow attribute is fair depends on a number of factors. Being aware of where and why it is being used can benefit you in many ways and may help you determine what you should do when linking reciprocally.
Nothing can take the place of active moderation whether you run a forum, a blog or manage a reciprocal link list. Knowing how sites are linking to yours can help you make wise decisions.