A source of damage is a permanent, a spell on the stack (including one that creates a permanent), or any object referred to by an object on the stack. A source doesn't need to be capable of dealing damage to be a legal choice.
Can be used even when there is no damage to prevent. It prevents the next damage (if any) from the source this turn.
Cycling is an activated ability. Effects that interact with activated abilities (such as Stifle or Rings of Brighthearth) will interact with cycling. Effects that interact with spells (such as Remove Soul or Faerie Tauntings) will not.