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.
Glossar
Market Price at Expiration
Price ⎊ ||The market price at expiration is the definitive reference value used to calculate the final payoff for options contracts, often sourced from a decentralized oracle network.
Tokenized Futures
Derivation ⎊ Tokenized futures represent the fractional ownership of a future cash flow, typically associated with an underlying asset, expressed as a digital token on a blockchain.
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.
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.