How does impermanent loss in decentralized finance work?

Impermanent loss in decentralized finance occurs when an automated market maker’s algorithm-based asset rebalancing method generates a difference between the price of a token in a liquidity pool and the price of that token outside the liquidity pool. For example, in Uniswap liquidity pools, asset pairs must maintain equal total values. The balance of similar values is controlled by the formula: x*y = k. The procedure ensures that the total value of one asset in a Uniswap liquidity pool is always equal to the total value of the other asset in the collection.