To understand the term liquidity provider, you need to understand each word separately.
In the global sense, a provider is a service provider. And in traditional Finance, these are financial organizations that provide working capital to markets.
Liquidity is the speed and volume of selling value in the market, at a price not lower than the market price. The higher the speed and volume, the more liquid the asset is.
The most common cryptocurrency market liquidity providers are CEX and DEX. They provide services for exchanging one cryptocurrency for another or for Fiat money, ensuring the conclusion of trade between users.
However, in cryptocurrency, the term liquidity provider is most often implied when referring to such decentralized exchanges as Uniswap or Balancer.
In order for users to trade on these exchanges, Uniswap and Balancer use the liquidity pool mechanism. Each user can put their tokens in these pools, thereby providing liquidity to the trading pair. In this way, the user becomes a liquidity provider. Its incentive is to receive % of the trade fee.