Shielding DeFi Infrastructure Builders: A Crucial Step Forward

Welcome to Crypto Long & Short, our institutional newsletter. This week, we explore key topics: - Alexandra Levis Expert Insights Safeguarding DeFi Infrastructure Builders By Jennifer Rosenthal, DeFi Education Fund's Chief Communications Officer The growing involvement of traditional finance companies in DeFi-related initiatives is a promising trend, as it signifies the embracing of technological innovations that will underpin 21st-century finance. There's a mounting recognition that open-source, permissionless, programmable, non-custodial, globally accessible, and interoperable technology offers significant upgrades to certain aspects of the financial system. For those new to DeFi or seeking to leverage it for their customers, the DeFi Education Fund, a nonpartisan nonprofit, invites you to join us in protecting the technology and infrastructure that give DeFi its value. Key policy objectives we believe are worth defending include: Over the past few months, our team has engaged in productive discussions with Congressional members, appreciating their genuine efforts to draft legislation that reflects a neutral, decentralized technology understanding. The protection of software developers has emerged as a significant topic, especially since most industry participants agree that safeguarding those who build DeFi is crucial for its use. A notable example is the Promoting Innovation in Blockchain Development Act of 2026, introduced by Representatives Scott Fitzgerald, Ben Cline, and Zoe Lofgren. This act aims to protect software developers from being misclassified under criminal code, clarifying that the law applies only to those controlling customer assets and transmitting funds on behalf of customers. Rep. Scott Fitzgerald noted, 'Innovators and software developers have been unfairly targeted by an overly aggressive regulatory approach. This act draws a clear line between developers and those who manage funds, providing legal clarity, protecting innovation, and allowing law enforcement to focus on genuine criminal activities.' Similar to the early internet, blockchain technology is evolving faster than existing regulations. Engineers developing open, disintermediated systems do not fit neatly into financial regulations designed for intermediated systems. As more individuals and companies interact with decentralized infrastructure, our collective voice can shape thoughtful policy outcomes. We should support initiatives that foster clarity, reduce uncertainty, and enable responsible participation across both centralized and decentralized markets. Thank you for taking DeFi's tools and technology seriously. We hope you will join us in defending the principles that make DeFi possible. Principled Perspectives Ethereum's Scaling Problem: Beyond Throughput By Alexis Sirkia, Chairman and Co-founder, Yellow Network Vitalik Buterin has acknowledged that most Layer 2 networks are fragmenting Ethereum rather than scaling it. However, the diagnosis doesn't address the root issue: the rollup model was based on the incorrect assumption that Ethereum's limitation was throughput, when the actual constraint was how value moves between participants. Rollups increased capacity by creating parallel execution environments but produced isolated liquidity pools that can't interact without bridge infrastructure. This has led to a concentration where Base and Arbitrum capture 77% of all L2 DeFi TVL, with smaller rollups seeing a 61% decline in usage since June 2025. Bridge infrastructure has lost $2.5 billion since 2021 due to custodial chokepoints. Instead of improving bridges, the industry should adopt state channels, which allow peer-to-peer transactions off-chain, with the base layer serving as the enforcement mechanism. This approach eliminates the need for intermediaries and the associated vulnerabilities. The CFTC's approval of the first U.S. framework for perpetual futures will shift a significant share of $14 trillion in offshore derivatives volume into regulated venues. The infrastructure to absorb this shift needs to settle cross-chain in real-time without custodial chokepoints, a capability rollups cannot provide. Headlines of the Week By Francisco Rodrigues This week's headlines highlight the growth of bridges between traditional finance and crypto, alongside the devastating impact of smart contract exploits. Chart of the Week Aave's Market Share Declines After rsETH Exploit Aave's TVL market share dropped from ~51.5% in February to ~39% following the April 18 KelpDAO rsETH exploit, which froze rsETH markets and triggered deposit withdrawals. Active loan share fell only ~2% (54% to ~52%), as existing borrowers couldn't easily unwind. The AAVE token is down ~50% from its January peak, reflecting both bad debt risk and the reputational cost of being DeFi lending's largest venue when a collateral asset failed.