Why Is the Settlement Price Often a Time-Weighted Average Instead of a Spot Price?

A Time-Weighted Average Price (TWAP) is used for settlement to prevent manipulation of the final price. A spot price, which is the price at a single moment, is vulnerable to a short-term, concentrated attack (e.g. a flash loan attack) that could unfairly influence the settlement.

A TWAP, calculated over a period, smooths out these temporary spikes, ensuring the settlement is based on a robust, representative market price.