The general mechanism of an air compressor is 
a piston or rotary component (e.g. rotary screw or vane) that draws in atmosphere, which is compressed into a storage container. Naturally, since the piston or rotary component needs to move regularly and smoothly because of this to work, it generally must be lubricated.
In a lubricated air compressor, there is lubricating oil which will keep the piston or rotary element running well without damaging the system. The lubricant also really helps to dissipate temperature and maintain air compression efficiency.
Oil-free air compressors also use a piston or rotary element, however they bypass the lubrication problem by coating the compression element with a pre-lubricating materials like Teflon. Some oil-free compressors may also use water instead of oil for the lubricating and Water Lubricated Air Compressor cooling procedure. These alternate materials secure the pump and invite the mechanism to move smoothly without the need for any oil-centered or synthetic lubrication.