Why do we say "it lives" but also say "it can live?" What is the difference in the usage of live and lives?

Answer 1

"it lives" is simply the present tense form, and for 3rd person singular, we add an -s in English.

"can" is used here as an auxiliary verb, and needs to be used with a verb's first principal part. Read and study this webpage for a really good explanation of auxiliary verbs:
http://grammar.ccc.commnet.edu/grammar/auxiliary.htm