What Is the Difference between Physical and Cash Settlement in Tokenized Derivatives?

Physical settlement involves the actual delivery of the underlying asset (the ERC-20 token) upon the derivative's expiration. For a tokenized call option, the seller delivers the underlying token to the buyer.

Cash settlement, conversely, does not involve the transfer of the underlying asset. Instead, the difference between the derivative's strike price and the market price at expiration is calculated, and only the corresponding monetary value, usually in a stablecoin (an ERC-20 token), is transferred between the parties.