Safeguarding DeFi's Infrastructure and Its Builders

Welcome to our Crypto Long & Short institutional newsletter. This week, we explore the need to safeguard the people behind DeFi infrastructure and discuss Ethereum's Layer 2 strategy. Jennifer Rosenthal, chief communications officer at the DeFi Education Fund, highlights the importance of protecting open-source, permissionless, programmable, noncustodial, globally accessible, and interoperable technology. As traditional finance companies increasingly engage with DeFi, there's a growing understanding of its potential to upgrade the financial system. The DeFi Education Fund invites participants to join in defending key policy objectives that support this technology. Recently, the bipartisan Promoting Innovation in Blockchain Development Act of 2026 was introduced to protect software developers from inappropriate misclassification under criminal code. This legislation aims to clarify that certain regulations apply only to those controlling customer assets and transmitting funds on behalf of customers. Meanwhile, Alexis Sirkia discusses Ethereum's scaling problem, arguing that it was never about throughput but rather about how value moves between participants. The rollup model, designed to increase capacity, has instead led to the fragmentation of Ethereum, with dozens of isolated liquidity pools that can't interact without bridge infrastructure. This has resulted in significant losses due to bridge exploits. Sirkia suggests that state channels, allowing peer-to-peer transactions off-chain with the base layer serving as the enforcement mechanism, could be a more effective solution. The week's headlines also touch on the growth of traditional finance's engagement with crypto and the impact of smart contract exploits on the market. Aave's market share has notably dropped following the rsETH exploit, highlighting the risks associated with DeFi lending.