How the Joint Works
A joint is formed where the ends of two bones come together. The ends of the two bones are covered by articular cartilage. The cartilage is surrounded by what is called the joint capsule. Inside the joint capsule, there is synovial fluid which serves as a lubricant for the joint and also as a source of nutrients for the cells that maintain the joint cartilage.
Synovial fluid contains dissolved gases -- oxygen, nitrogen, and carbon dioxide. When you crack your knuckles or when pressure is applied to a joint, the pressure inside the joint capsule expands but the expansion is limited by how much synovial fluid is contained in the joint. Synovial fluid cannot expand unless pressure inside the joint capsule drops and the dissolved gases can escape out of the fluid. The cracking sound comes from the gases rapidly being released from the fluid.
There have been a few studies over the years that considered whether or not cracking knuckles caused arthritis. One study found that there was no increase of hand arthritis among knuckle crackers, however, knuckle cracking was related to hand swelling and lower grip strength.
Another study indicated that while knuckle cracking was not associated with arthritis, it was associated with damage to ligaments that surround the joint and dislocation of tendons. While cracking your knuckles is not linked to causing arthritis, there may be a connection to soft tissue injuries.
Effect of habitual knuckle cracking on hand function. Annual of the Rheumatic Diseases. 1990 May;49(5):308-309.
What makes the sound when we crack our knuckles? Scientific American. October 26, 2001.