When you deposit two tokens into a liquidity pool to provide liquidity, if the two tokens' relative price later changes, the value you eventually withdraw will be less than "doing nothing and just holding the two tokens" — that difference is impermanent loss. The more prices diverge, the bigger the loss; it only disappears if prices happen to return to where they were when you deposited, hence "impermanent."

In a decentralized exchange (DEX), a fund pool formed by many people depositing two tokens, letting others trade directly against the pool without traditional buyer-seller order matching. Those who deposit are liquidity providers, who supply liquidity and earn a share of trading fees. It's the core of automated market making in DeFi.