The general mechanism of an air compressor is a piston or rotary component (e.g. rotary screw or vane) that allures atmosphere, which is compressed into a storage container. Naturally, since the piston or rotary component needs to move consistently and smoothly for this to work, it generally needs to be lubricated.
In a lubricated air compressor, there is Water Lubricated Air Compressor lubricating oil which will keep the piston or rotary component running smoothly without damaging the mechanism. The lubricant also helps to dissipate temperature and keep maintaining air compression efficiency.
Oil-free air compressors also use a piston or rotary element, but they bypass the lubrication problem by coating the compression element with a pre-lubricating material like Teflon. Some oil-free compressors may also use water in place of essential oil for the lubricating and cooling process. These alternate materials protect the pump and allow the mechanism to move smoothly with no need for any oil-centered or synthetic lubrication.