When you supply a liquidity pool with two tokens, the pool rebalances them automatically as traders swap against it. If one token rises sharply against the other, the pool ends up holding more of the loser and less of the winner. Compared to simply holding both tokens in your wallet, you come out behind. That gap is impermanent loss.
It is called impermanent because it only exists on paper while you stay in the pool. If prices drift back to where they started, the gap closes. If you withdraw while the prices are far apart, the loss becomes permanent and real. Trading fees earned as a liquidity provider can offset it, sometimes fully, but not always.
The takeaway is that providing liquidity is not free yield. It is a trade: you earn fees in exchange for taking on price-divergence risk. Pairs of tokens that move together have little impermanent loss; volatile pairs can have a lot.