Does a Physically Settled Smart Contract Derivative Require a Collateralized Position?
Yes, it requires collateralization. For a physically settled derivative, the seller (writer) of the option or future must post collateral to guarantee they can deliver the underlying asset if the contract is exercised.
The smart contract locks this collateral, ensuring that the buyer's right to the asset is protected and that the contract can be executed atomically and trustlessly.
Glossar
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.
Physically Settled Smart Contract Derivative
Settlement ⎊ A physically settled smart contract derivative mandates the exchange of the actual underlying asset upon expiration, as opposed to a cash settlement based on price differences.
Physically Settled
Settlement ⎊ Physically settled derivatives contracts require the actual transfer of the underlying asset from the short position holder to the long position holder at maturity.
Decentralized Derivatives
Architecture ⎊ Decentralized derivatives represent a fundamental shift in financial contract design, moving away from centralized exchanges and intermediaries towards blockchain-based systems.
Underlying Asset
Foundation ⎊ The concept of an Underlying Asset, within cryptocurrency derivatives and financial markets, establishes the core reference point for valuation and risk transfer.