Grafana is a dynamic visualization tool that utilizes variables to enhance dashboard interactivity by allowing users to filter and focus on specific data points without having to edit queries or rebuild dashboards. Variables can be defined as dropdown lists, text boxes, or constant values, each serving different purposes such as filtering server data or switching between data sources. Grafana supports various types of variables including query variables, which populate dropdowns from data sources, and custom variables, where values are set manually. Additionally, interval variables allow users to compare data over different time periods, while ad hoc filter variables facilitate automatic filtering for certain data sources. Chained variables enable the use of one variable's value in another's query, and data links allow users to click directly on a dashboard element to filter data, streamlining the process of data exploration. This flexibility makes Grafana a powerful tool for creating reusable dashboards that can adapt to various data requirements and user preferences.