Impermanent loss is a term used to describe the difference in the price of assets in token pairs and the potential losses the liquidity provider incurs as a result of that difference. Impermanent loss occurs when assets are provided to liquidity pools in decentralized exchanges (DEXs), the price of one of the assets changes relative to the other, and automated market makers (AMMs) rebalance the pool.
For example, for a token pair of ETH and USDT provided to a liquidity pool, impermanent loss can happen if ETH increases in value significantly. This will result in arbitrage traders buying the asset until its price is the same as the rest of the market, meaning you will hold less of the asset whose value increased than if you held the asset in your wallet.
The reason the loss is labelled as impermanent is that the divergence in price may reduce or completely disappear if asset prices normalize to previous levels. On the other hand, if you withdraw while there is a difference in price between the current and original price ratio, the loss becomes realized. Impermanent losses may be offset by trading fees and pool rewards to some extent.
