Can a Decentralized Exchange (DEX) Offer Physically-Settled Derivatives?

Yes, a DEX can theoretically offer physically-settled derivatives, but the mechanism is different and typically relies on smart contracts. Settlement is achieved via an atomic swap or direct token transfer governed by the contract's code, which automatically moves the underlying asset upon expiration.

The custody risk is shifted from a centralized third party to the security and immutability of the smart contract itself.