I dove into their FAQ which explains it. I don’t agree with their logic, but the core idea seems to be that in order to run their equivalent of a TOR relay you have to stake a certain amount of their crypto, and you periodically receive some of the crypto as a reward for running the node. The theory is that the more nodes there are, the less crypto is available on the market and the more expensive it will become to acquire enough crypto to create new nodes. It’s all supposed to make it prohibitively expensive to control a significant amount of the network.
The fatal flaw in the reasoning is the assumption that anyone will actually care enough about their crypto to drive the price up. With no central authority setting a price for the crypto the price becomes whatever anyone is willing to buy or sell it for. Their fatal assumption is that scarcity automatically generates value. It does not. A thing needs some kind of value in addition to scarcity to become valuable.
The problem is that the biggest service Cloudflare provides is DDoS protection, and doing that requires that you have more bandwidth available than your attacker. Having enough bandwidth to withstand modern botnet powered DDoS attacks is ridiculously expensive (and it’s also a finite resource, there’s only so much backbone infrastructure). Basically it’s economically infeasible to have multiple companies providing the service Cloudflare does. You might be able to get away with two companies doing so, but it’s unlikely you could manage more than that without some of them starting to go bankrupt.