There’s no difference. If you’re going to allow B to borrow A’s share and sell it to D, now both A and D own a share. D can lend their share to E, who sells it to F. (D has no idea they bought some special share, because they didn’t.) Now, F to lend to G who can sell to H, etc.

Yeah this is the explanation I've seen people give.

It's kind of weird to distinguish "naked" shorting from this when they're functionally the same.

Friction is the difference. Naked shorting removes the need to locate borrow. That need acts to prevent runaway supply expansion. Naked short selling also circumvents the rights of share owners as a class to decide whether to allow synthetic share creation.

Fair enough. I assumed that locating shares to borrow would be relatively easy.

Typically it is, but for heavily shorted stock, the fees go up.

How are they functionally the same?

Initial conditions: Alice has a share of XYZ

Proper shorting: Alice lends her share to Bob, Bob sells the share to Carol

=> Alice has a share (lent to Bob, who will have to pay her the eventual dividends), Bob owes a share to Alice, Carol has a share (which has full rights including voting and dividend)

Naked shorting: Bob sells an imaginary share to Carol

=> Alice sill has her share (with full rights)

What does Carol have?

In the situation being discussed, where more shares than the available float are shorted, they are functionally the same because both can theoretically create infinite amounts of shares.

Both look like they "create shares" but the consequences are different. Don't you agree?

Would you rather be the Carol who bought the XYZ stock that Alice lent to Bob or the other one?

Proper-shorting-scenario Carol owns a perfectly good XYZ share.

What does naked-shorting-scenario Carol have?

What do you mean by consequences?

In the naked short scenario you don't immediately have the share, though I'm unsure how important this is for someone shorting the stock.

In saying that, brokers can still fail to deliver the share with non-naked shorting in which case it is effectively a naked short.

In the case of $GME, there were a lot of shares that failed to deliver in December as shown in this /r/wallstreetbets post: https://www.reddit.com/r/wallstreetbets/comments/l97ykd/the_...

I'd say that having the share is important for the person buying the stock.

Short-selling is forbidden to reduce the risk that when you want to buy a share and buy the share you find a few days later that in fact you didn't quite buy a share because whoever sold the share to you didn't have one to sell.

But it's fine, I concede the point.

As far as I care, you can find weird to distinguish "naked" shorting from "borrow-and-sell" shorting because if the short-seller who didn't borrow the stock before selling it does borrow the stock afterwards to be able to settle the trade the end result is the same.

Ok, I understand where you're coming from now.

The person who's most affected by naked shorting is the unsuspecting person who buys the borrowed share from the shorter because nobody actually has that share yet.

From the buyers perspective I can understand the importance of this, I just didn't see how the distinction made a difference to the short interest.

Right. Same reason people are flipping out when a stock goes from 199.99% floating to 200.01% floating. (They call it “over 100% shorted!!!”)

The first scenario can be repeated an infinite number of times, too. Just have A sell the share right back to B and do the same thing. Now A has to deliver two shares to B.