What Is the Difference between Physical and Cash Settlement in a Smart Contract Derivative?
Physical settlement involves the actual delivery of the underlying asset upon expiration, while cash settlement involves only the transfer of the monetary difference between the contract price and the market price. Smart contracts can handle both.
Physical settlement requires the contract to manage asset transfer (e.g. token delivery), whereas cash settlement requires an accurate oracle price feed for the final calculation.
Glossar
Cash Settlement
Settlement ⎊ Cash settlement, within cryptocurrency derivatives and options trading, represents the fulfillment of a contract obligation through a monetary exchange rather than physical delivery of the underlying asset.
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.
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.
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.