The area is collectively named Gunnuhver, after a female ghost that was buried there. She caused great disturbance until a priest set a trap for her and she fell into it. This happened about 400 years ago.
The mud pools take form where steam from boiling geothermal reservoir water emanates and condenses and mixes with surface water. Gases such as carbon dioxide and hydrogen sulphide make the water acid. This causes alteration of the fresh lava rock to clay.