Varnish is a reverse proxy caching system that stores cached content in memory to serve web requests very quickly. It works by checking for cached content on common requests and serving it directly if there, otherwise fetching the requested content from the backend server and caching it for future requests. Key advantages are reduced CPU usage and faster response times. Varnish installation involves changing the Apache port, configuring the Varnish default VCL file to point to Apache, and starting both services. Status can be checked using cURL commands.