OAuth is an open protocol that allows secure authorization for API access. It works by issuing access tokens that grant access to specific resources without sharing login credentials. The OAuth flow involves 3 steps - obtaining a request token, user authentication, and exchanging the request token for an access token. The request and access tokens are used to sign API requests by calculating a signature based on the token secret and other parameters. This allows APIs to verify the identity of the requesting application and user without exposing sensitive credentials.