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

"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

The words "live" and "lives" are both forms of the verb "to live," but they are used in different contexts.

The word "live" is the base form of the verb and is used in the present tense for singular subjects. For example, in the sentence "He lives in the city," "lives" is used because the subject is "he," which is singular.

On the other hand, "lives" is used in the present tense for plural subjects. In the sentence "They live in the city," "live" is used because the subject is "they," which is plural.

When it comes to the phrase "it can live," the word "can" is a modal verb indicating ability or possibility, and it is followed by the base form of the verb, which is "live." So, in this case, "live" is used without an -s at the end, regardless of whether the subject is singular or plural.

To summarize, both "live" and "lives" are forms of the verb "to live," but "live" is used for singular subjects in the present tense, "lives" for plural subjects in the present tense, and "live" after modal verbs like "can" to indicate ability or possibility.