Unknown sources refer to locations outside of the Google Play Store from which you downloaded an APK app. Google considers its Play Store as the only reliable source for installing apps on Android.
However, there are instances when you may need to download from unknown sources, like apps from third-party marketplaces or apps in beta-testing. Platforms such as Appaloosa enable app distribution outside the Play Store and require such permissions. This method of distribution is also called sideloading.
Since early versions of Android, users have had to explicitly allow the enabling of unknown sources in settings.
If you try to install a downloaded APK without enabling this setting, you will see the following message for security reasons:
"Your phone is not allowed to install apps from this source to protect your security."