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Where does "Smol" come from? It's supposed to mean "Small" right? If yes then what's the etymology and reason for popular usage?

It's just internet speak from the days of tumbler. It usually has cutsie connotations.

Tumbler speak has a bunch of whacky things, notably "chimkin nuggers."

In the specific case of SmolLM, it originates from the meme in this dataset https://huggingface.co/datasets/bigcode/the-stack-smol