Liquidity pools, in essence, are pools of tokens that are locked in a smart contract. They are used to facilitate trading by providing liquidity and are extensively used by some of the decentralized exchanges (DEXes).
One of the first projects that introduced liquidity pools was Bancor, but they became widely popularized by Uniswap.
In this order book model buyers and sellers come together and place their orders. Buyers (bidders) try to buy a certain asset for the lowest price possible whereas sellers try to sell the same asset for as high as possible.
For trades to happen, both buyers and sellers have to converge on the price.
This can happen by either a buyer bidding higher or a seller lowering their price. Market makers are entities that facilitate trading by always willing to buy or sell a particular asset. By doing that they provide liquidity, so the users can always trade and they don’t have to wait for another counterparty to show up.