Glossary
Latent Space
Short answer
The internal space where a model represents images in compressed mathematical form.
Diffusion models process images not as pixels but as a much smaller numerical representation. That representation is the latent space, and it is why generation is fast.
Points close together in latent space correspond to similar images. That makes smooth transitions between two images (interpolation) possible.
It is not a setting a practical user touches, but it explains why the same prompt gives similar yet different results: each generation starts from a slightly different point in that space.