How does Indie Hackers points get distributed?

As far as I can tell, simply creating a post or comment earns you a point so, to that extent, it is a measure of your engagement with IH.

Other people can also upvote your posts and comments and, obviously, those votes are added to your score as well.

I would just treat it as feedback rather than a competition.

Points are simply from upvotes, the badge, if you mean the little yellow icon, I think it's simply that their product was featured in an interview on IH.