In brief, short-selling is the way traders are making money even when the quoted price of a given asset (stock, crypto-token, or fiat currency) is going down. It is a future contract, where a trader is selling units of an asset he/she does not own, but borrows it from another trader or investor, with the attached obligation to return the borrowed asset (plus any interest agreed) to the lender, by buying it at market price in the future. Usually, such a contract is agreed with a maturity (termination) date, where the borrower has to return the borrowed units to the lender, but there are also perpetual contracts, with no expiration date.
How this works in practice.
Trader A expects the price of an asset - let's say ETH - to go down, and profit may be made out of this. Trader A goes to Lender B, and asks to borrow units of the asset - let's say 10 ETH. At this point, Lender B may or may not ask for some kind of collateral for the units. Many DeFi apps are asking for double the value of the assets to be lended - so if Trafer A wishes to borrow 10 ETH, he/she has to offer collateral equal to 20 ETH. This collateral is returned back to Trader A, once the borrowed assets (plus any agreed interest) is returned back to Lender B.
With the borrowed assets in his/her account, Trader A sells those 10 ETH for $3,850 (or 3,850 USDC) - or $385 per unit. If ETH goes down to $350, Trader A buys 10 ETH for $3,500 (or 3,500 USDC) - or $350 per unit, returns the 10 ETH to Lender B (plus any interest agreed, e.g. 0.01 ETH) and keeps the $350 (minus interest paid). So, if the agreed interest is 0.01 ETH, Trader A has to return 10.01 ETH, that costs $3,503.50, in order to complete execution of the contract - and having any collateral returned - so the net earnings in this transaction are slightly lower. If, however, ETH price goes up - say, at $400 - in a contract under a maturity date, Trader A has to buy 10.01 ETH (10 ETH borrowed, plus 0.01 ETH interest) at that price, and pay $4,004, losing $154 in the transaction. In perpetual contracts though - and provided that Trader A is convinced that ETH price will eventually go down - Lender B collects only interest for a period (usually 30 days), and extends the contract, until Trader A returns the assets - in our example those 10 ETH - he/she borrowed to Lender B.
The difference with everyday asset purchases, is that while any gains or losses are theoretical, until the trader liquidates his/her position, in short-selling any gains or losses are almost immediate, since the asset has to be returned - or, otherwise, interest has to be paid - to the lender.
Risks
The most obvious risk is when the market is moving against the trader's prediction; the trader has to buy the borrowed asset at a higher price than the price it was sold. It's not the only risk involved though, especially in the crypto world. A trade may be profitable in gross values, but when any costs involved are counted in, it may turn to be losing the trader money. For short-selling to work, trades need to be made in a highly volatile market, or a market not extremely volatile, but in a clear downward trend. Another risk is collateral offered being devaluated faster than the borrowed assets, and in that case the trader may need to offer additional collateral.
And finally, although this is not a risk directly related to short-selling, it's needless to say that due to the large number of transactions involved, short selling is not appropriate for transaction valued under $300.
