What Is ‘Impermanent Loss’ for a Liquidity Provider in an AMM?

Impermanent Loss (IL) is the temporary loss of funds a Liquidity Provider (LP) experiences when the price of the deposited assets changes compared to simply holding them in a wallet. It occurs because the AMM's algorithm forces the LP to sell the rising asset and buy the falling asset to maintain the pool's ratio.

The loss is 'impermanent' because it can be recovered if the asset prices return to their initial deposit ratio, but it often becomes permanent upon withdrawal.