At expiry, Contango allows traders to have their position physically delivered or to settle it through cash (i.e. cash settlement).
Due to the nature of Contango and how it uses the trader's margin, at expiry she needs to bring the missing capital to make up for the difference in the debt she owes.
This means that, if she's long ETHDAI, she will receive ETH at expiry. If she’s short, she’ll have to deliver ETH - which means she’ll be receiving DAI.
Let’s go through the two examples:
Physical delivery is not vulnerable to price manipulation. This is because, generally speaking, cash settled instruments are settled against an index that normally relies on third-party spot markets where sometimes volumes are thin and can be moved - read: manipulated - very easily (source: Coinflex).
The transaction to physically-delivered a position indeed doesn't have any price impact. A trader thus ensures she will receive or deliver the underlying asset for the exact price and quantity agreed at the moment of opening her position.
A traders can also cash-settle her position and receive equity (with PnL) to her wallet, with no need to bring any additional capital to deliver the full position. Everything will be settled in the quote currency to her wallet.
With cash settlement, traders don't need to bring extra capital to close their position. The transaction to cash-settle, however, will incur price impact.
Fore more info visit the At expiry section on the tutorials page.
Traders can close their position earlier, before expiry, and thus crystallise PnL. No extra steps are required: the protocol will simply revert the transactions carried out to open the position, as explained in the position closing section.