How Does Impermanent Loss Arise for Liquidity Providers in an AMM Pool?

Impermanent loss (IL) occurs when the price ratio of the deposited tokens changes after the initial deposit. If the price of one asset rises or falls relative to the other, an arbitrageur will trade with the pool, reducing the number of the appreciating asset.

The loss is "impermanent" because it only becomes realized if the LP withdraws the assets before the prices return to the original ratio. It represents the opportunity cost compared to simply holding the assets outside the pool.