The source() function in dbt is used to reference raw tables defined in your source configuration file, usually schema.yml. When you write source('raw_data', 'users') in your model SQL, dbt looks up the raw_data source and users table name. During compilation, dbt replaces the source() call with the actual raw table name like raw_data.users. Then the compiled SQL runs in your data warehouse, fetching raw data rows. This process allows you to write models that depend on raw tables without hardcoding table names, improving maintainability and documentation. If the source is not defined, dbt will fail to compile the SQL. The execution steps show how source() is resolved, compiled, and executed step-by-step.