Originally used as "Laugh out Loud" but now it has other uses, specifically to break up a tense mood in a conversation, try to ask an awkward question, or trying not to be rude. It is not a statement of laughter at all, rather it has evolved into an added word that makes difficult conversations more bearable through text, email, and instant messaging.
Person 1: "Hey so I saw you peeking through my window yesterday while I was undressing, lol"
Person 2: "Oh yeah..lol"
Person 1: "That's kinda creepy, lol"
Person 1: "Hey I just wanted to ask...were you the one that stole my wallet? It had all of my important credit cards, point cards, and my gym membership, not to mention a lot of cash,and 20 people say they saw you took it...just asking, lol"
Person 2: "Yeah, i took it and charged everything, cashed out your points, and worked out today, oh and I had a race to see how fast I could spend your money, lol"
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