A liquidity pool is the collection of tokens an exchange has to offer for swaps. Consider this as a piggy bank with 2 types of tokens when you can take some amount of token X, but you need to repay the same amount as the equivalent of the token Y.
Each swap moves the price up or down, depending on the trade direction.
Providing liquidity makes you eligible to claim a portion of trading fees generated by each swap made in the pool you added liquidity to.
3) Select token X and token Y.
Adding liquidity to Tethys
4) Click "Supply" and confirm the transaction.
5) And that's it! From this point, you are going to earn a portion of trading fees as a liquidity provider.