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Spending an Insight on an attack adds an AD to the attack after the fact. Since damage is calculated as the difference between the highest AD and the highest CD, this means spending an Insight can be compared to landing a perfect parry in a Soulslike video game.
For example, if a character strikes an enemy and rolls a 5 on their AD versus a 4 on the opponent's AD, they're only dealing 1 damage. If they spend an Insight, they roll the additional AD and potentially deal 2-7 damage with the attack instead.
Correct, in the current iteration of the rules, defeating a 1 CD enemy and gathering Tinder from them would give you 1d6 Tinder, while defeating a Formidable 3 CD enemy would give you 3d6 Tinder. The GM is of course free to adjust values if they feel like something has significant value or ambient energy (harvesting from a small pile of coins vs. from the throne room of a forgotten king).