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1: If you've got significant, quality content that is generated in significant enough quantity you can use RSS to syndicate that content.
2: You can use RSS feeds to display the latest news, articles or other content on your site.
Kind of both. Some pick it up, others need you to submit to them.
> do you lace your feeds with links?
I recommend you shouldn't.
1) RSS search engines don't use algorithms based on <h1>, <h2> etc. nor do they follow links.
2) If you're using <h1>, <h2> and other tags which help in organic optimization in your feed, and someone else displays your syndicated content (in HTML), you're actually making them rank for your keyword(s).