The word "overlay" comes from the English overlay, meaning "a covering" or "a superimposition." In games and esports, it refers to any image displayed on top of the main picture that is not part of the game itself. If you see a chat window, a notification banner, or a score table on screen that isn't in the game's own interface, that is an overlay.
Types of overlays
The word is used in several senses, and the context usually makes clear which one is meant.
Platform or program overlay. This is a window that can be opened from inside the game with a hotkey. Through it you can message friends, open a browser, view your friends list, or accept an invitation to a lobby (the room before a match starts) without minimizing the game. Game platforms and voice chat programs have overlays like this.
Streamer overlay. A stream is a live broadcast of a game. On top of the picture, streamers place a frame for their webcam, a feed of recent subscribers and donations, a banner with the stream title, and the viewers' chat. This layer is assembled in the streaming software and is visible only to viewers, not to the player in the game.
Tournament broadcast overlay. At esports tournaments, the on-screen graphics are created by the broadcast crew: the score, team names, logos, a timer, team economy, and player information. For viewers this is a familiar part of the broadcast, even though it has nothing to do with the game itself.
Stats overlay. Some programs display additional data on top of the game: frame rate, graphics card load, temperature, and ping. This is handy for working out why a game is lagging.
Overlays and the rules of the game
Overlays have a downside too. Since an overlay is drawn on top of the game, it can be used not only for convenience but also for unfair hints. That is why developers and anti-cheat systems treat overlays carefully: official, well-known programs are usually allowed, while homemade or unknown ones may raise suspicion. If a program shows something on top of the game and also interferes with its memory, it is no longer an overlay but cheat software.
The practical takeaway is simple: use overlays from trusted platforms and programs, and before installing any third-party utility, read the rules of the specific game or service. An overlay that merely shows chat or frame rate is a convenience. An overlay that shows what the player is not supposed to see is a violation.
Sometimes overlays get in the way: they cover part of the screen, use up computer resources, or conflict with each other. That is why almost any program lets you turn them off or reconfigure them in its settings.