What Role Do Automated Market Makers (AMMs) Play in Impermanent Loss?

AMMs are the core technology behind DEXs that use a mathematical formula (like x y=k) to price assets in a liquidity pool. They are the direct cause of impermanent loss.

When external market prices change, the AMM's formula forces an arbitrage opportunity, which shifts the ratio of assets in the pool, resulting in the IL for the liquidity provider.