Liquid staking lets you stake tokens while maintaining liquidity through derivative tokens. Normally staking locks your tokens. You can't access them. If you stake 32 ETH to become a validator, that ETH is locked. You earn staking rewards but you can't trade or use those tokens. Liquid staking protocols solve this. You stake ETH and receive stETH (or similar) in return.
The protocol stakes the ETH on your behalf and distributes rewards. You can trade stETH, use it in DeFi protocols, and still earn staking rewards. It's staking without losing liquidity. Lido pioneered this model and dominates the market. You deposit ETH and receive stETH. You can swap stETH back for ETH at any time through decentralized exchanges.
Meanwhile, your ETH is staking and earning rewards. This greatly increases staking participation. Without liquid staking, regular users couldn't stake. They lacked the 32 ETH or the technical ability to run a validator. Liquid staking lowered the barrier to entry. The downside is centralization. If one liquid staking provider controls most staking, they have outsized influence on the network.
Lido controls the majority of liquid staking. This concentration is problematic for decentralization. But it's also realistic given technical and operational barriers to staking. Liquid staking represents a pragmatic solution to a real problem.