**Understanding Impermanent Loss **

Impermanent loss (IL) occurs when the price ratio of the tokens in a pair changes significantly from the time of providing liquidity. The loss is "impermanent" because it can be mitigated if the prices return to the original ratio. However, the loss becomes permanent if an LP withdraws its liquidity while the price is still different.

This phenomenon occurs because AMMs always maintain a constant product of the quantities of the two tokens in the pool. When the price of one token increases, traders will buy it from the pool, decreasing its amount and increasing the amount of the other token until the product of the quantities returns to constant. As an LP, if you had held onto your tokens instead of providing liquidity, you could have benefited more from the price increase.

LPs should understand this concept and employ strategies to manage IL.