Regarding shorting, to be able to short there needs to be actual coins on an exchange so they can be sold in the first place. Most coins are in the masternodes, a lot are in hot/cold storage controlled by random holders/users, and a tiny percentage is in the exchanges, and even tinier percentage of those are being offered for shorting. Hard to make profit shorting considering the amount of masternodes you'd have to own. Of course the possibility to do so is there, but it's not as simple as it's being made out to be.
Before reading your post, I had written in another thread:
Arguments along the lines of "if that is true, why didn't happen yet" are refuted with:
1. Perhaps only I am the one who realized how to attack it. And I just described it today.
2. There isn't much incentive to do that attack, because (from what I've heard about most of the trading volume on altcoins being fake) there isn't any way to extract any significant value from Dash via shorting.
An illiquid coin not used as a currency with all the coins locked up as a pump and dump game for speculators is already an attack.
Point is that if you have a widely used currency, shorting will be possible.
We are talking about what sort of design should we all support that can scale up and be used by millions of users. That is our goal right?
It also isn't true that physical coins have to back a short, even on exchanges (but certainly not off exchanges or on derivative exchanges where people may simply owe coins or have negative exposure to the price of coins they don't have, by whatever mechanism).
When you lend coins on an exchange the borrower sells them to short. Now the buyer of those coins may lend them out again. Collateral margin requirements limit overall leverage but the collateral need not be in the same coin. Leverage of a particular coin is unbounded i.e. an arbitrary short interest may be rooted in a limited (much smaller) amount of physical, as long as sufficient physical exists to settle the largest
individual trade.
There is no realistic possibility to enumerate potential incentives that exist
outside the system.
Szabo:
Similarly, small-game/large-game problems often arise when software or security architects focus on an economics methodology, focusing on the interactions occurring within the defined architecture and failing to properly take into account (often because it is prohibitively difficult to do so) the wide variety of possible acts occurring outside the system and the resulting changes, often radical, to incentives within the system. For example, the incentive compatibility of certain interactions within an architecture can quickly disappear or reverse when opposite trades can be made outside the system (such as hedging or even more-than-offsetting a position that by itself would otherwise create a very different incentive within the system), ...