What is __pycache__?
From what I understand, a cache is an encrypted file of similar files.
What do we do with the __pycache__ folder? Is it what we give to people instead of our source code? Is it just my input data? This folder keeps getting created, what it is for?
Answer
When you run a program in python, the interpreter compiles it to bytecode first (this is an oversimplification) and stores it in the __pycache__ folder. If you look in there you will find a bunch of files sharing the names of the .py files in your project's folder, only their extensions will be either .pyc or .pyo. These are bytecode-compiled and optimized bytecode-compiled versions of your program's files, respectively.
As a programmer, you can largely just ignore it... All it does is make your program start a little faster. When your scripts change, they will be recompiled, and if you delete the files or the whole folder and run your program again, they will reappear (unless you specifically suppress that behavior).
When you're sending your code to other people, the common practice is to delete that folder, but it doesn't really matter whether you do or don't. When you're using version control (git), this folder is typically listed in the ignore file (.gitignore) and thus not included.
If you are using cpython (which is the most common, as it's the reference implementation) and you don't want that folder, then you can suppress it by starting the interpreter with the -B flag, for example
python -B foo.py
Another option, as noted by tcaswell, is to set the environment variable PYTHONDONTWRITEBYTECODE to any value (according to python's man page, any "non-empty string").