Short squeeze arises when short sellers rush to close their short positions resulting in further price increases.

When an investor sells an asset short, they borrow the asset from another investor and sell it on the market, with the hope that the price of the asset will go down. If the price of the asset goes up instead, the investor will have to buy it back at a higher price in order to return it to the original owner, resulting in a loss.

In the context of decentralized finance (DeFi), a short squeeze refers to a situation in which the price of a DeFi asset rises quickly, causing investors who have sold the asset short to lose money. This can happen for a variety of reasons, such as a sudden increase in demand for the asset or a decrease in its supply.

A short squeeze can have significant impacts on the DeFi market, as it can lead to sudden and significant changes in the prices of assets. This can create opportunities for investors who are able to capitalize on the price movements, but it can also lead to losses for investors who are caught on the wrong side of the trade. As such, short squeezes should be approached with caution and careful consideration.

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