Yes. Substack is entirely focused on subscriptions, so we don't build any additional functionality to support affiliate links or advertising, but you are free to use them.
You don’t need to put content behind paywalls. Not having paywalls will let you reach more people and will increase the virality of your content.
Not necessarily. You can keep attracting subscribers by using sponsors that align with their interests. For example, if your newsletter is about living a natural and organic lifestyle then selling natural soap with no chemicals is likely to do well. Why? Because it is aligned. In fact your subscribers will appreciate your telling them about products they love.
With both sponsorships and affiliate links, revenue is tied to performance. Performance depends on how well the product you are advertising sells. This depends on how much value it provides your audience. It all boils down to alignment.
Because their market is less focused it is harder to find alignment. As a small creator you have a very narrowly focused market. You can define your audience much better. This means you know who they are and what products they are likely to like and buy.