Lye is a harsh chemical used in making soap or washing solutions. The term was vastly more common in the 1800s (see ngram below) because people made their own lye at home. The process includes soaking hardwood ashes for days in water. The water becomes lye, which was then used to make soap. When it became more cost-effective to buy bars of soap in a store, the use of the word lye decreased.
Unfortunately, a common way to hear the word lye is in relation to a crime where someone has used the caustic chemical to harm someone else.
Its homonym lie means to tell a falsehood or recline, among other definitions.