What is impermanent loss?

Impermanent loss is what is impermanent loss, in short: the drop in value a liquidity provider sees when the prices of the two tokens they deposited in a pool move apart, compared to just holding them separately. It matters because pool rewards and fees can still leave you worse off than simple holding once you account for this gap.

Say you deposit $500 of ETH and $500 of USDC into a pool. If ETH doubles in price, arbitrage trades rebalance the pool, and you end up with less ETH and more USDC than before, worth less than if you'd held the original $1,000 in ETH and USDC untouched.

The loss is "impermanent" only if prices return to their original ratio; if you withdraw while they're still apart, it becomes permanent and real.