Powdered graphite is essentially sand made of graphite. You wouldn’t use sand as a lubricant, so what gives?
Sand is made of silicon in a very stable crystal configuration. Graphite is carbon in a layered, unstable configuration. Putting diamond powder into a mechanism would be worse than sand, so it’s not the carbon.
Graphite is softer than almost any metal, Even paper can abrade it, that’s how pencils work. Graphite powder works by forcing graphite into all the little cracks and flaws in the metal surface. The graphite is so soft that it wears until the surfaces match exactly, and can slide freely.
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