Providing liquidity to a decentralized exchange can generate fees, but withdrawals may yield less than holding the tokens separately, a condition known as impermanent loss. Liquidity pools are pools of two tokens managed by automated market makers that use a constant product formula, such as x*y = k, to set prices without an order book. When the market price of one token diverges from the pool's price, arbitrageurs trade to align the pool's price, which changes the token ratio in the pool. As a result, a provider ends up with more of the token whose price fell and less of the token whose price rose, reducing the pool's value relative to simply holding the original assets. An example: depositing 1 Ether worth $1,600 and $1,600 of a stablecoin, then seeing Ether rise to $2,000, leads to a pool rebalance that makes the combined withdrawal worth about $3,500, compared with $3,600 if the tokens had been held. Impermanent loss is quantified with the formula (2 × √r ÷ (1 + r)) − 1, where r is the price ratio at withdrawal versus deposit; when the price ratio doubles, the loss is about 5.7% before fees. Trading fees and token rewards earned as a share of pool activity can offset the loss, and a position is profitable when total earnings exceed the loss. Research shows that in many volatile pools the loss can exceed the fees, meaning providers may be better off holding the assets. To limit exposure, providers can choose stablecoin pairs or other closely correlated assets, where price divergence is minimal, though fee income may be lower. Other strategies include adjusting the deposit ratio, using concentrated liquidity ranges, and modeling scenarios with calculators before committing funds. Common mistakes include assuming advertised yields are guaranteed profit and providing liquidity to highly volatile or uncorrelated pairs without assessing risk. Impermanent loss remains a paper loss while positions stay in the pool; it becomes realized only when liquidity is withdrawn during price divergence. Understanding the balance between fee income and impermanent loss is essential for anyone considering liquidity provision, and using calculators and research can help evaluate the risk.