We'll deal with a single BitAsset, for convenience I will call it BitUSD, but this also applies to other BitAssets (e.g. BitGLD). Each paragraph in the following is preceded by a term in parentheses; the goal of the paragraph is to define that term.
(Short Position) Accounts can have positive or negative BitUSD balance. A negative BitUSD balance is called a "short position."
(Short Sale) A negative BitUSD balance can only be obtained through a short sale. A "short sale" is a sale of BitUSD which results in a negative BitUSD balance in the seller's account.
(Market Price Lock) A short sale can only occur by the fulfillment of a public Ask order (either market or limit order); thus, a short sale always occurs at the market price. I call this the Market Price Lock.
(Collateral) When a short sale occurs, "collateral" is set aside. The collateral consists of the money the buyer used for the purchase (less fee), and some amount of the seller's money.
(Buyer Perspective Equivalence Principle) From the buyer's point of view, there is no difference between buying from a short seller and buying from a long seller on the exchange.
(Pie) The collateral is set aside into a container I'll call a Pie. Each pie is tied to an account and a BitAsset. So if Alice shorts BitUSD, and Charlie shorts BitUSD and BitGLD, there will be three pies: Alice's BitUSD pie, Charlie's BitUSD pie, and Charlie's BitGLD pie.
(Margin Requirement) The initial size of the pie divided by the buyer's contribution to the pie. This is 2x in the BitShares whitepaper, but Bytemaster has proposed an increased margin requirement of 10x.
(Equity) The piece of the pie that would be given to the attached account in a purely theoretical, "fair" unwinding of the short position. Can be specified as either a percentage of the total pie, or a number.
(Total Win Principle) When the Tracking Price of BitUSD is equal to zero, equity is one hundred percent.
(Weak Linearity of Short Position) Equity decreases linearly as a function of Tracking Price, until reaching zero at the Wipeout Price.
(Tracking Price) The price that is used to determine equity is called the Tracking Price. I believe it is currently specified as the average of the best bid and the best ask, but am not 100% sure about that.
(Wipeout Price) For a given pie, the Tracking Price at which equity becomes zero is called the Wipeout Price.
(Capitalization Principle) When an account initiates a short position, its initial equity is equal to its contribution to the pie.
(Slope) The Slope is the rate-of-change of equity position. The Total Win Principle, the Weak Linearity of Short Position, and the Capitalization Principle combine to determine the Wipeout Price and Slope.