The 
overall mechanism of an air Water Lubricated Air Compressor compressor is a piston or rotary component (e.g. rotary screw or vane) that allures air flow, which is compressed into a storage tank. Naturally, since the piston or rotary element needs to move consistently and smoothly because of this to work, it generally must be lubricated.
In a lubricated air compressor, there is lubricating oil which keeps the piston or rotary component running smoothly without damaging the mechanism. The lubricant also helps to dissipate heat and keep maintaining air compression efficiency.
Oil-free air compressors also use a piston or rotary element, however they get around the lubrication problem by coating the compression element with a pre-lubricating material like Teflon. Some oil-free compressors could also use water in place of oil for the lubricating and cooling process. These alternate materials secure the pump and allow the mechanism to move smoothly without the need for any oil-centered or synthetic lubrication.