whats thermal paste/compound do?

"Thermal grease (also called thermal gel, thermal compound, thermal paste, heat paste, heat sink paste, heat transfer compound, heat transfer paste (HTP) or heat sink compound) is a fluid substance, originally with properties akin to grease, which increases the thermal conductivity of a thermal interface by filling microscopic air-gaps present due to the imperfectly flat and smooth surfaces of the components; the compound has far greater thermal conductivity than air (but far less than metal). In electronics, it is often used to aid a component's thermal dissipation via a heat sink."

It doesn't reduce friction as far as I know, but yes, it does help (a lot) to transfer the heat from the CPU to the heatsink, by filling in the micro-valleys in them, allowing for more surface contact.