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What is Impermanent Loss?
Impermanent loss occurs when the price ratio of tokens in a liquidity pool changes after you deposit. The bigger the price change, the more value you lose compared to simply holding.
Full Explanation
Impermanent loss (IL) is the difference between holding tokens in a liquidity pool vs holding them in your wallet. When token prices diverge from the ratio at deposit time, the AMM rebalances, causing LPs to hold more of the depreciating token and less of the appreciating one. A 2x price change causes ~5.7% IL; 5x causes ~25.5%. It's "impermanent" because it reverses if prices return to the original ratio. Trading fees earned may offset IL, but in volatile markets, IL can exceed fee income.
Example
You provide ETH/USDC liquidity when ETH is $2,000. ETH doubles to $4,000. Your LP position is worth less than if you just held ETH + USDC separately. That's impermanent loss.