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This is explained on this support answer
It's a thing on Revanced YT even if spoofing an old version. Applies to the web version as well now
This seems to be due to some new EU law ?
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this post was submitted on 16 Aug 2023
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Am I the only one to find Google to be completely stupid here? Aren't they missing out on a chance to push videos with ads?
Yes and no. Without a users video history (& other tracking turned off) best they can do is push random ads hoping it would hit one in a million. That is not effective and sometimes even diseffective (hitting a controversially opposite target). Tha harms YouTube on both ends more than the ad’s company
By pushing users to turn it on they apparently gain more than just pushing random horse crap.
There's not really much evidence that targeted ads work any better than random ads. Plus they already have a point of data to serve ads: what video the user is watching.
Edit: both ends = b2b&b2c
Honestly this is making me want to turn mine off, but having a watch history is very convenient
alternative youtube frontends like Invidious, Newpipe or Freetube (Desktop) keep their own watch history without letting google know