The general mechanism of an air 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 component needs to move regularly and smoothly for this to work, it generally needs to be lubricated.
In a lubricated air compressor, there is lubricating oil which keeps the piston or rotary element running smoothly without damaging 
the system. The lubricant also really helps to dissipate heat and keep maintaining air compression efficiency.
Water Lubricated Air Compressor oil-free of charge 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 may also use water instead of essential oil for the lubricating and cooling procedure. These alternate materials guard the pump and allow the mechanism to move smoothly with no need for any oil-based or synthetic lubrication.