Liquidity describes how readily an asset can be traded at a stable, predictable price. A highly liquid market has many buyers and sellers and deep order books (or large liquidity pools), so even sizeable trades don't move the price much. A thin, illiquid market can see large price swings from relatively small trades.
In decentralised finance specifically, "liquidity" often refers to the funds locked in a liquidity pool, which other users trade against. Liquidity is one of the most important practical factors to understand before trading any asset, especially smaller or newer tokens.