Sources list is for selecting a playlist or folder and it is then displayed in the Library list on the right from the sources list.
Above sources are buttons to add new playlist, add new folder for playlists, and to remove current playlist or folder.

if iTunes library is enabled in Disco XT preferences, playlists of iTunes can be shown by clicking 'iTunes' button above the sources. There is also a keyboard shortcut option to set for this button (Edit Menu > Keyboard setup).

Playlists are sorted alphabetically.
Playlist can be drag and dropped in the list to above a folder name to move the playlist to that folder.
Folders can be placed inside another folders.

To show or hide the folder contents, click triangle on the left side.

Top most item 'Library' has a triangle, click it to show 'Searches' and 'Last Added' playlists which are generated automatically. 'Searches' logs search texts typed to the search field and 'Last Added' shows songs last imported to the library.

'Play Log' item can also be opened with the triangle to show separate logs for sessions, when you quit/exit Disco XT and then relaunch it, that is a new session.

To duplicate playlist, right-click a playlist and select 'Duplicate'.
To rename a playlist or a folder, double click in the list.

If a playlist or folder is inside a folder and you wish to move it back to the root level (where the first folders are), click and select 'Move to the Root'