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Reduce friction and oxidation.
To keep it from rusting, to reduce wear and unwanted friction.
It keeps the chains from rusting.
Whenever two objects rub against each other they create friction which reduces their freedom of movement. An application of oil, which is a lubricant, reduces the amount of friction thus allowing the objects to move more freely. Also, oil may be applied as a rust retardant for metal parts of the bicycle.

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