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Skinning is a feature which helps players to obtain leather and other Creature Products, which can then be used to receive Outfits and Addons. To use this feature you need an Obsidian Knife, which can be obtained in the Obsidian Knife Quest.

Skinning
Skin Receive Statistics Obsidian Knife
Behemoth Behemoths Perfect Behemoth Fangs Perfect Behemoth Fang/Skinning Perfect Behemoth Fang
Bonebeast Bonebeasts Hardened Bones Hardened Bone/Skinning Hardened Bone
Clomp Clomps Raw Meat Raw Meat/Skinning Raw Meat
Dragon Dragons Green Dragon Leather Green Dragon Leather/Skinning Green Dragon Leather
Dragon Lord Dragon Lords Red Dragon Leather Red Dragon Leather/Skinning Red Dragon Leather
Lizard Templar Lizards Lizard Leather Lizard Leather/Skinning Lizard Leather
Minotaur Minotaurs Minotaur Leather Minotaur Leather/Skinning Minotaur Leather
Lord of the Elements Lord of the Elements Neutral Matter Neutral Matter/Skinning Neutral Matter
The Mutated Pumpkin The Mutated Pumpkin Pumpkin, and more Pumpkin/Skinning Pumpkin

Method

The Obsidian Knife can only be used on recently killed creatures, bodies in their first decay state. To use it, you simply use the knife's Use With feature and target the body.

Most of the time, you won't get Creature Products if you skin a body. If you failed, you will see a yellow spark. If you see green sparkles, the product of the specific creature will have appeared in the same container as your Obsidian Knife. The chance of getting a dead body skinned successfully varies from creature to creature.

Since the 2015 Winter Update corpses can be skinned immediately after the creature died, so you do not need to wait 10 seconds anymore before being able to skin a corpse. As corpses can only be skinned in their first state of decay, this gives you a time frame of 300 seconds during which a corpse is skinnable. After skinning a body, it will automatically rot one level (to the second state of decay) to prevent multiple skins on the same corpse.

There are two exceptions to the two rules mentioned above: both the corpse of the Lord of the Elements and of The Mutated Pumpkin can be skinned multiple times, at a 100% success rate (but still only once per player).

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You can obtain the achievement Skin-Deep by successfully skinning creatures 500 times. In the past (before 2016) unsuccessful skinning of Bonebeasts counted as well, but this is not the case anymore.
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See also:

Corpses, Dusting, and Unrusting