Impermanent loss happens when the price of tokens in a liquidity pool diverges from the price at which they were deposited. When users provide tokens to a decentralized exchange (DEX) liquidity pool, they receive a proportionate amount of the pool tokens, which represent their share. If the value of the deposited tokens changes significantly while they are locked in the pool, the liquidity provider may end up with less value than if they had simply held onto the tokens in their wallet. The loss is termed 'impermanent' because it can be mitigated if the asset prices return to their original state before withdrawal.