I'm not sure why, but on the story forum the subject of dragon incest comes up more often than you might commonly consider the subject.
The problem with incest: In our world it can cause all sorts of genetic problems. Otherwise suppressed harmful traits may be expressed. Genetic remixing is prevented, dramatically slowing evolution and threatening the survival of the species.
Socially there are many problems as well, taboos developed to prevent inbreeding for both genetic reasons as well as political/economic. However these are somewhat arbitrary beyond direct blood links and are unnecessary if the genetic issues are not present.
We don't know that Azerothian life uses a similar system of 50% DNA from each parent. But just for the sake of not being confusing, let's just say it does. This would mean that incest shares the same problems there as here. However they have magic, so they can avoid most of these.
We know magic changes biology. Sometimes for the better, sometimes not. The high elves are changed by their exposure to magic. As are the fel elves. The orcs were also changed, which is why they continue to have green skin even after fel magic had stopped being used (quite as often). In this regard magic appears to create something similar to pre-Mendelian genetics, when we thought that acquired traits could be passed on.
This change could be intentional in the case of the dragons. They could use magic to create new genes, effectively causing mixing of genetics even when there would normally be none.
Even without intentional change, the low levels of magic of one form or another, everywhere, could increase the mutation rate. Think of it like if we all lived next to poorly shielded nuclear power plants. However magic is not perfectly random. It has patterns. Fel magic would cause different changes than spirit magic. This is why we don't see the high cancer rates or constant appearance of new genetic diseases as we would if magic were just a form of radiation.
Magic would also explain the many hybrids, even from species which evolved on different planets. Even if their genetic code doesn't spell out the same way, magic could fill gaps, translate it, recode it.
I haven't yet found any scholars studying the genetics of Azeroth. The druids appear to do some research into life, but very little on how one generation influences the next.
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