What Is the Difference between Physical and Cash Settlement for a Derivative?
Physical settlement means that upon expiration, the actual underlying asset is delivered from the seller to the buyer in exchange for the agreed-upon price. For example, a physically-settled Bitcoin futures contract requires the seller to deliver the actual Bitcoin.
Cash settlement means that upon expiration, only the net financial difference between the contract price and the market price is exchanged in cash (or a stablecoin), and no physical asset changes hands. DeFi derivatives are overwhelmingly cash-settled for simplicity and efficiency.
Glossar
Cash Settlement
Resolution ⎊ The core of a cash settlement, particularly within cryptocurrency derivatives and options trading, involves the final exchange of funds rather than the physical delivery of the underlying asset.
Net Financial Difference
Settlement ⎊ The net financial difference is the core concept underlying the cash settlement of many cryptocurrency derivatives, particularly futures and European-style options.
DeFi Derivatives
Volatility ⎊ DeFi derivatives represent synthetically created financial contracts whose value is derived from underlying cryptocurrency assets, extending traditional derivative functionalities ⎊ like futures, options, and swaps ⎊ onto decentralized blockchain networks.