Short selling is a trading strategy that speculates on the decline in a tokens price. It can be used to hedge downside risk, or to speculate on a price decline.
A seller opens a short position by borrowing tokens, selling the tokens at the market. When a trader is ready to close a position, he then buys back those tokens hopefully at a price less than what he borrowed it for and returns the tokens to the lender. The difference representing the traders profit/loss on the trade.
Ooki enables anyone with tokens to lend them to shortsellers/borrowers and earn competitive interest on their crypto that would otherwise be sitting idly in their wallet.
On Ooki, with the upcoming launch of Interest Rates 2.0, the lending rates are determined by the market demand for borrowing/shorting.
A trader who is long a token can only lose 100% of their outlay if the stock moves to zero. However, a trader who has shorted a token can lose much more than 100% of their original investment. The risk comes because there is no ceiling for a tokens price.
Timing short selling can also be very difficult, but it is a crucial component when it comes to short selling. Cryptomarkets historically decline much faster than they increase, and a sizeable gain in a token may be wiped out in a matter of days or weeks on bearish development.
Short squeezes can push up the price, and make short sellers cover their shorts for a loss prior to a large price decline.