Sight-glasses are used in many applications in many industries, and all have to do with the fact that it is necessary to visually monitor the level of a liquid inside a container that is opaque, with container walls that you cannot see through.
In compressed air applications, usually the sight-glass is used on the outside of an opaque compressed air filter bowl or a lubricator bowl.
A sight-glass will be plumbed vertically alongside the outside of the bowl or the tank or whatever vessel is being level-monitored, with an inlet into the sight-glass through the wall at the bottom of the vessel, and another near the top.
The drawing shows the sight-glass on the left of the filter bowl.
For clarity, my drawing shows the sight-glass standing-off the bowl. Different manufacturers have different style sight-glasses, with some being completely attached to the side of the bowl, some are stand-off designs.
It is called a sight-glass, since originally, the vertical tube was made of glass - for visibility, of course.
Currently, sight-glass materials used in compressed air applications are more likely to be synthetic plastic composites that offer the clarity of glass, but without the same potential for breakage.