Multi-level marketing is a model that allows affiliates to sign up affiliates themselves, and be credited for the profits these 'sub-affiliates' pull in. This model was made famous by AMWAY and similar pyramid style programs.
There is nothing inherently wrong with the system. Say you leave this site and sign up as an affiliate of Golden Palace Affiliates. You'll get paid the same as if you'd signed up directly, without ever visiting this site, and in fact you won't even know that you've become a sub-affiliate of ours. Since I referred you to the program though, the program credits me a little for whatever profits you can pull in.
This is a description of a two-tiered multi-level marketing model. It's also possible to have more tiers, in which case I sign you up as a sub affiliate and make a percentage, but then you can also sign a sub affiliate up under you. If it is a three tiered model, this new affiliate becomes my sub-sub-affiliate, and I also get a cut of what they produce, albeit smaller than the cut received from my sub-affiliates. You, as my sub affiliate, are paid on your sub affiliate the same way I am paid on you.
So then, multi-level marketing gives you the opportunity to earn a residual income without ever producing any profit for the merchant directly. You could make it your mission to only market to affiliates, never to customers, and earn your living that way.