Can a Cryptocurrency Derivative Be Physically Settled?
Yes, a cryptocurrency derivative can be physically settled. Since the underlying asset is a native digital token, the smart contract can be programmed to automatically transfer the actual tokens from the seller's collateral to the buyer's wallet upon exercise or expiration.
This is a straightforward process on-chain, as the contract has custody of the collateralized tokens and can execute the transfer without a third-party clearing house.
Glossar
Physically Settled Crypto
Settlement ⎊ Physically settled crypto derivatives represent a class of contracts where the obligation at expiry is fulfilled through the direct delivery of the underlying cryptocurrency asset, rather than a cash settlement.
Underlying Asset
Futures Pricing incorporates the cost of carry, which in crypto markets includes funding rates derived from perpetual swap markets and the time value associated with holding the spot asset.
Physical Settlement
Delivery ⎊ The concept of physical settlement, within the context of cryptocurrency derivatives and financial options, signifies the actual transfer of the underlying asset ⎊ be it cryptocurrency, tokens, or fiat currency ⎊ rather than a cash-based settlement.
Smart Contract
Code ⎊ The contract is fundamentally self-executing code deployed on a distributed ledger, embodying the terms of the agreement in an immutable format.