An Interoperability Framework for Payment Systems

Novel payment systems based on blockchain networks promise to redesign financial architecture, but a notable concern about these systems is whether they can be made interoperable. This concern stems from the concept of the “singleness of money”—that payments and exchange are not subject to volatility in the value of the money itself. Volatility and speculation can arise from the payment medium, which may have speculative characteristics, or from frictions that undermine the ability of one or more payments systems to interoperate. In this two-part series, we outline a framework for analyzing payment system interoperability, apply it to traditional and emerging financial architectures, and relate it to the ability of the payment systems to maintain singleness of money.
What Makes Cryptocurrencies Different?

Permissionless blockchains, which support the most popular cryptocurrency networks like Bitcoin and Ethereum, have shown that it is possible to transfer value without relying on centralized trusted third parties, something that is new and remarkable (although perhaps most clearly useful for less developed financial markets). What makes permissionless blockchains able to transfer value without relying on a small number of trusted third parties is the combination of several components that all need to work together. The components themselves are not particularly new, but the combination of these components is more than the sum of its parts. In this post, we provide a high-level overview of these components and how they interact, taking Bitcoin as an example.