Settlement

Originally CDS was designed to be vaguely similar to an Insurance Contract so that when a Credit Event was determined the buyer of Protection would Physically Settle the contract, that would involve delivering some defaulted bonds or loans and in exchange they would receive the Notional Amount of the contract, so for example 10 million USD of bonds which may only be worth 3.5 million USD would be delivered and the seller of protection would pay 10 million USD of cash.

Note that the denomination of the bonds does not need to match the denomination of the contract, but it does need to be "Standard Settlement Currency" which usually means one of USD, GBP, EUR, JPY, AUD.

At some point it was noted that more CDS was outstanding than existed bonds to be delivered which could potentially cause a Squeeze on the bonds and distort the market. That caused people to ask for a net cash settlement with the seller paying to the buyer the Notional Amount * (1 - Final Price) with the final price being calculated independently from the two parties to the contract.

This cash settlement is now the far more common method of settlement of credit events into a CDS contract.