Distributed tracing in Next.js applications enables the monitoring of performance across complex distributed systems by linking operations across multiple services into a single trace, facilitating the identification of bottlenecks and debugging of issues. To implement this, the Highlight SDK is added to the client-side code, automatically injecting trace headers into outgoing requests, while server-side code uses middleware to propagate these headers to downstream services via W3C trace context headers. This setup allows downstream services to associate operations with the correct trace and create nested spans for specific code blocks, while tools like Highlight provide visualization of the entire service stack, showing operation timing and relationships to address performance issues effectively. The system is designed to work with any observability vendor's tools due to the use of open-source W3C trace context propagation headers, with Open Telemetry offering a more vendor-neutral approach to simplify instrumentation.