What Is ‘Impermanent Loss’ for a Liquidity Provider on a DEX?

Impermanent loss is the temporary difference in value between holding tokens in a liquidity pool versus simply holding them in a wallet. It occurs when the price ratio of the deposited tokens changes after the deposit.

The loss is considered 'impermanent' because it can reverse if the token prices return to their original ratio. It is a major risk for DEX liquidity providers.