Observability is crucial for understanding and analyzing the internal state of systems, particularly in modern distributed environments, and is maintained through tools like Prometheus and Grafana. These tools help monitor Redpanda clusters, producers, and consumers by exporting and visualizing metrics, ensuring system health and performance optimization. Redpanda's observability setup involves predefined dashboards for monitoring key performance metrics, such as Kafka topic metrics and consumer offsets, and uses Docker and Docker Compose for seamless integration. By setting up a Redpanda cluster with Prometheus and Grafana, developers can gain real-time insights into system operations, facilitating efficient troubleshooting and performance management. The observability infrastructure supports both local and cloud deployments, offering flexibility for developers and site reliability engineers to maintain effective system operations.