Liquidity in cryptocurrency markets essentially refers to the ease with which crypto tokens can be swapped or exchanged to other tokens (or to government issued fiat currencies). This simply means you can convert your Ethereum to a reasonable cash value.
Liquidity pools are collection of tokens locked in a smart contract used to facilitate trades between assets. Liquidity pool is a fundamental technology behind the current DEFI (Decentralised Finance) ecosystem. It is not only an essential component of most Decentralised Exchanges but also used in most borrowing and Lending protocols.