The overall mechanism of an air compressor is a piston or rotary element (e.g. rotary screw or vane) that draws in surroundings, which is compressed right into a storage container. Naturally, because the piston or rotary element needs to move regularly 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 element running smoothly without damaging the mechanism. The lubricant also helps to dissipate temperature and maintain air compression efficiency.
Oil-free of charge air compressors also use a piston or rotary element, but they get around the lubrication problem by coating the compression component with a pre-lubricating materials like Teflon. Some oil-free compressors may also use water instead of essential oil for the lubricating and cooling process. These alternate materials secure the pump and invite 
the mechanism to go smoothly with no need for any oil-based or synthetic lubrication.