When you sell your stock certificate, you hand it over to someone who can loan it out themselves.

As a thought exercise, consider that I can borrow your stock and sell it right back to you short. We can repeat this process a million times. 1 million shares short now based on 1 share.

This is not naked shorting because borrowed the stock from you each time with you willingly participating.

This was very helpful thank you.

It would take a bit more time, because stock certificates are a pain to handle. But I would let you borrow my stock certificates (for interest and with good collateral), you would sell them to someone; then that person might let you borrow them (for interest and with good collateral) and you could sell them to another someone (or the same someone, whatever).

Certificated stock is slightly less fungible than shares of book-entry stock; because I probably want you to return a single certificate with my shares, and you may have to separate or combine certificates which takes time and money. One of the many reasons certificated stock has been on the way out.

Thanks, this cleared up my (mis)understanding!

This is where a block chain will be useful to make sure that there is a fool proof locking mechanism.

When you short a stock you sell it. Whoever you sold it to can loan it again. There's no limit to that.

Technically there is should be only one person owning the stock and only one person who can short it at a time.

That is why the system needs something like a block chain semaphore.

If they were printed on stock certificates, how would you get to 0.01% short interest? You get to any other number by repeating that process.

Imagine a company with 1 share of stock floating. Abel buys that share and loans it to Baker (via Abel's broker). Baker borrows the share and sells it to Charlie. Charlie loans their share to Diane. Diane sells it to Earl. Earl loans their share to Fred. Fred sells it to Gary...

The recursive nature is what i was not understanding, thank you.

naked short selling. https://en.wikipedia.org/wiki/Naked_short_selling

No, naked refers to not having the borrow. More than 100% can be borrowed if someone buys it from someone who borrowed it and loans it to someone else. That's just short, whatever the percentage, not naked short.

This helped me understand the difference, thanks!