In trading, settlement is the final step where the buyer and seller fulfill their obligations—whether it’s delivering an asset or settling the payment. While different methods of settlement exist, they can have a significant impact on how markets function, how assets are valued, and how participants manage risk.
At the core of this process are two methods: physical settlement and cash settlement.
The key difference between the two is in the outcome. With physical settlement, the actual asset changes hands, while in cash settlement, the price difference is simply paid out in cash.
This article will explore why we at Marginal have chosen to utilize physical settlement and how it enables our vision of being a leverage trading hyperstructure.
Cash Settlement VS Physical Settlement
Physical settlement refers to the delivery of the actual underlying asset when a futures or options contract reaches its expiration. This means that when a buyer closes a contract, they will receive the asset itself rather than just the difference in price.
In contrast, cash settlement does not involve the transfer of the actual asset. Instead, the difference between the contract price and the market price at expiration is paid out in cash.
For example:
The price of Bitcoin is currently at $50,000. Alice wants to go long 1 BTC.
With physical settlement:
Regardless of the price of Bitcoin, Alice will receive 1 BTC after settling the contract.
With cash settlement, if Alice is long 1 BTC:
If Bitcoin reached $60,000, Alice will receive $10,000 - this is the price difference of Bitcoin at the beginning and conclusion of the trade.
If Bitcoin reached $70,000, Alice will receive $20,000.
Why Physical Settlement?
While cash settlement is popular in cryptocurrency derivatives, especially on centralized exchanges handling large-cap tokens, it comes with several drawbacks for onchain assets.
Marginal is intended to provide leverage for any onchain token, so one potential issue would be determining the final price for settlement. The illiquid nature of many onchain tokens can lead to problems such as oracle manipulation, inaccurate price feeds, or slippage upon conversion to cash. These factors can distort the settlement process, making cash settlement less suitable for decentralized markets.
By delivering the actual asset, we eliminate these risks and ensure that the contract remains tied to the real value of the underlying token. Traders can be confident that they will receive exactly what they are trading, regardless of market fluctuations or external factors. This reliability is essential in building a secure and trustworthy decentralized trading platform.
Conclusion
With the ever-evolving cryptocurrency landscape, it was crucial to consider every aspect of trading to create an antifragile leverage trading platform. At Marginal, we chose physical settlement because it enables permissionless, decentralized leveraged trading for any onchain asset.
Our commitment to physical settlement is not just about offering a superior settlement method—it’s about creating a leverage trading hyperstructure that operates indefinitely, with minimal reliance on centralized entities, while ensuring that the trading ecosystem remains sustainable and resilient.