Why did they compete naked in the Olympics?

Yes, athletes in the ancient Olympics (who were all MEN, by the way) did compete in their birthday suit. It wasn't always this way, but it seems that in 720 BC, a runner named Orsipus of Megara was the first to run NAKED. One source says that he did this because he thought it gave him an edge. Another source says that he lost because his shorts fell down. Yet another says that he was killed when he tripped on his shorts. After this everyone competed NAKED, for safety's sake.

Well, there's NAKED, and then there's slightly less naked. Some young men did wear a thin leather thong, called a kynodesme, that they tied around the foreskin of their penis and to a waist belt or the base of the penis. If you search for pictures of ancient Olympians you can often see a depiction of this device on the athletes in question.

Incidentally, since all of the (men) athletes were NAKED, married women were banned from watching the games, on penalty of death. Unmarried women, though, were encouraged to attend.

The End!