Psilon in this case means plain or simple (as opposed to compound or two-letter), as in spelled with one letter, because when the name was coined in the Koine Greek period, υ was pronounced /y/ like οι (but not like ι as in Modern Greek yet). Similarly, epsilon (ε) was pronounced like αι (as it still is).
It was one of several "i" sounding vowels (like english has: i as in bin, e as in be, y as in gym, etc, roughly sounding the same).
"Y" has "i psilon" meaning "high i" (literal) or "slim/bare i" (referring to how it was pronounced).