Overview
Impermanent loss occurs when the price of the tokens you deposited into a liquidity pool changes compared to when you deposited them. The larger the price change, the more you are exposed to IL.
Why it Happens
AMMs use formulas to keep the value of the two assets in a pool equal. If one asset's price rises on external exchanges, arbitrageurs will buy it from the pool at a discount until the pool's price matches the market. This leaves the LP with more of the lower-value asset and less of the higher-value asset.
Why 'Impermanent'?
The loss only becomes 'permanent' if you withdraw your liquidity. If the prices return to their original ratio, the loss disappears.