What is impermanent loss?

Impermanent loss occurs when the relative prices of tokens in a liquidity pool change compared to when they were deposited. This results in a potential reduction in value for liquidity providers if they withdraw their funds while this price difference exists.

This loss is considered "impermanent" because it can diminish or disappear if the token prices return to their original ratios. Despite this risk, liquidity providers can offset impermanent loss through transaction fees and rewards earned from the pool.