Now, it can represent the same phoneme /j/ (palatal approximant) as the Hungarian letter j, but historically, it represented the different phoneme /ʎ/ (palatal lateral approximant).
The combination lj (considered two separate letters, L and J) is also common in Hungarian and is even pronounced [ʎ] by many speakers.
Originally, the digraph letter ly was used to represent the palatal lateral /ʎ/, just as the digraph letter ny is still used to represent the palatal nasal /ɲ/.
In the western dialects, /ʎ/ lost its palatal feature and merged with /l/ (alveolar lateral approximant).
[2] These examples are Hungarian words that use the letter ly, with the English translation following: