The term is unfortunate, because the loss is not impermanent in any useful sense. It describes the gap between a liquidity position and the same assets held untouched.
The pool rebalances against the mover
When one asset in a pair rises, arbitrageurs buy it from the pool until the quoted rate matches the outside market.
The pool therefore ends up holding less of the asset that went up and more of the one that did not, having sold into the rise the whole way.
That is the entire mechanism. The provider was a systematic seller of the appreciating asset without ever placing an order.
The comparison is against holding, not against zero
A liquidity position can gain value in absolute terms while still trailing the simple alternative of holding both assets in a wallet.
The shortfall is measured against that alternative, which is why a provider can see their balance grow and still have done worse than doing nothing.
The term impermanent came from the fact that if relative prices return to where they started, the gap closes. Relative prices frequently do not return.
The size depends only on the ratio change
For a constant-product pool, the shortfall is a function of how far the price ratio moved, not of the path it took or the time it took.
Small divergences produce very small effects, which is why stablecoin pairs and correlated assets carry so little of it.
Large divergences produce disproportionately larger shortfalls, so a pair where one asset multiplies while the other stays flat is the worst case.
Fees are the compensating income
Providers earn a share of the trading fee on every swap, and this accrues regardless of direction.
Whether providing was worthwhile reduces to whether accumulated fees exceeded the divergence shortfall over the period held.
High volume with low volatility is the favourable combination, and low volume with high volatility is the unfavourable one.
Design changes attack it from different angles
Curves designed for assets expected to trade near a fixed ratio concentrate liquidity around that ratio, reducing exposure to divergence.
Single-sided and hedged pool designs shift the exposure elsewhere, usually to a counterparty willing to take the directional risk for a fee.
None of these eliminate the underlying effect, because it originates in the pool selling whatever is rising, which is inherent to quoting a price from reserves.