As adenosine is created in the brain, it binds to adenosine receptors. This binding causes drowsiness by slowing down nerve cell activity. In the brain, this also causes blood vessels to dilate to let more oxygen into that organ during sleep. To a nerve cell, caffeine looks like adenosine: Caffeine binds to the adenosine receptor. However, caffeine doesn’t slow down the cell’s activity like adenosine would. As a result, the cell can no longer identify adenosine because caffeine is taking up all the receptors that adenosine would normally bind to.

This video from How Stuff Works shows how caffeine tricks nerve cells into believing it is adenosine:

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