Streams in Node.js provide a bridge between where data is stored and where it will be processed, offering memory efficiency and performance benefits over traditional techniques that read or write data. Streams are used to divide large data sets into smaller chunks, which are then processed one at a time, eliminating the need to read data from storage into memory before processing it. This allows for efficient memory usage, better performance, increased composability, and real-time applications. To create readable streams, developers can use the 'stream' module and send data using the push() method, while writable streams are used to write data to a file or stream by creating an instance of createWriteStream and calling the write() method on the data. Streams form the basis for many different applications, including real-time chat apps and video streaming, and can be used in conjunction with databases to extend their capabilities directly.