Streams are used in Node.js to efficiently process large amounts of data. There are four types of streams: readable, writable, duplex, and transform. Readable streams are used to read data from a source, writable streams write to a destination, duplex streams both read and write, and transform streams modify data as it flows through. Streams allow data to be processed sequentially in chunks rather than all at once, making them useful for large datasets and network connections.