Most explanations of impermanent loss are written for the person supplying liquidity. This one is written for the person trading against it, because the consequence lands on you: it governs whether the depth you are relying on will still be there when you want out.
The mechanism in one sentence
A constant-product pool must hold a ratio, so when one asset rises the pool has automatically sold some of it, and when one falls the pool has automatically bought more. A provider therefore ends up holding less of whatever went up and more of whatever went down, compared with simply having held both.
That gap is impermanent loss. It is called impermanent because it closes if the price returns to where it started — and the name misleads, because prices frequently do not, at which point nothing is impermanent about it. Fees earned along the way offset it. Whether they offset it enough is the provider’s whole business.
Why the trader should care
Because it makes liquidity procyclical in the wrong direction. The harder a token trends, the worse the position of everyone providing its depth, and the stronger their incentive to withdraw. Depth is most likely to leave exactly when price has moved most — which is exactly when you are most likely to want to trade against it.
This is not a moral failing of liquidity providers. It is arithmetic. But it means the pool you sized your position against during a quiet week is not the pool you will be exiting into after a large move, and nothing about the token itself has to have changed for that to be true.
The parallel worth noticing
Traders who read dealer positioning will recognise the shape. A dealer who is short gamma is forced to trade with the move and amplify it; a liquidity provider facing impermanent loss is pushed to withdraw depth as the move extends, which also amplifies it. Different mechanisms, same direction of travel — and it is why a shallow pool behaves a little like a short-gamma regime.
The difference is that a dealer is obligated and a provider is not. Nobody makes the provider stay, which is why tracking whether depth is arriving or leaving tells you more than any snapshot of how deep it is right now.