Impermanent loss refers to a momentary decrease in capital faced by those who supply liquidity to some of the decentralized trading platforms or automated market-making systems. It occurs due to the price volatility and the dynamic nature of the assets in the liquidity pool.

When individuals supply liquidity to a pool, they usually contribute balanced values of two distinct assets, like a pair of digital tokens. Upon providing liquidity, the liquidity provider receives tokens (interest-bearing tokens) that represent their ownership or stake in the liquidity pool. Nonetheless, when the values of the assets within the pool shift, the worth of the pool's tokens can also vary.

Impermanent loss arises when the proportional prices of the added assets differ from their initial deposit time. Should one asset rise in value considerably relative to the other, the individual offering liquidity might incur a loss upon retrieving their assets from the pool. This loss is called "impermanent" because it disappears or becomes permanent only if the liquidity provider decides to withdraw their funds when the relative prices have returned to their original levels.

It's crucial to understand that impermanent loss pertains solely to those offering liquidity and doesn't impact traders merely exchanging assets within the liquidity pool.

Impermanent loss is a trade-off for earning transaction fees as a liquidity provider, and it can be mitigated by careful selection of assets and understanding the risks involved.