How Does a Volatile Secondary Token Increase the Risk of Impermanent Loss for Liquidity Providers?

Impermanent loss is directly proportional to the magnitude of the price change between the two assets in the pool. If the secondary token is highly volatile, its price is likely to diverge significantly from the primary token (often a stablecoin or major asset like ETH).

A larger price divergence necessitates a greater rebalancing of the pool reserves, which is the definition of increased impermanent loss. The risk is minimized when the price ratio remains close to 1:1, as is the case with stablecoin pairs.