What Is the Difference between Cash Settlement and Physical Settlement?

Cash settlement means that at the contract's expiration, the difference between the contract price and the underlying asset's settlement price is paid in fiat or cryptocurrency. No actual physical asset changes hands.

Physical settlement means the actual underlying asset is delivered from the seller to the buyer upon expiration. Derivatives, especially those in DeFi, often use cash settlement because it is simpler and avoids the complexities of on-chain asset transfer.