Shielding DeFi Infrastructure Builders: A Critical Imperative

Welcome to Crypto Long & Short, our institutional newsletter. This week, we delve into crucial topics: - Expert Insights by Alexandra Levis Protecting DeFi Infrastructure Builders Jennifer Rosenthal, DeFi Education Fund's Chief Communications Officer, underscores the importance of shielding the people behind DeFi infrastructure. As traditional finance companies increasingly embrace DeFi, there's a growing recognition of the need for open-source, permissionless, programmable, non-custodial, globally accessible, and interoperable technology. The DeFi Education Fund invites all to join in protecting the technology and infrastructure that make DeFi valuable, focusing on key policy objectives. For instance, the Promoting Innovation in Blockchain Development Act of 2026 aims to protect software developers from misclassification under criminal code Section 1960, clarifying that it applies only to those controlling customer assets. This provides legal clarity, protects innovation, and allows law enforcement to focus on genuine criminal activity. Blockchain technology, like the early internet, is evolving faster than existing regulation. Engineers developing open, disintermediated systems don't fit neatly into financial regulations designed for systems with intermediaries. Collective support for legislative and regulatory initiatives that foster clarity and reduce uncertainty is essential for responsible participation across both centralized and decentralized markets. Principled Perspectives Ethereum's Scaling Problem: A Misdiagnosis Alexis Sirkia, Chairman and Co-founder of Yellow Network, argues that Ethereum's scaling issue was never about throughput but about how value moves between participants. The rollup model, designed to increase capacity by creating parallel execution environments, has instead produced isolated liquidity pools that can't interact without routing assets through bridge infrastructure. This has led to fragmentation, with Base and Arbitrum capturing 77% of all L2 DeFi TVL, while usage across smaller rollups has declined. The industry's response to bridge exploits by building better bridges was misguided, as the vulnerability lies not in the bridge implementation but in the premise that value needs to pass through an intermediary. State channels, allowing peer-to-peer transactions off-chain with the base layer serving as the enforcement mechanism, eliminate this premise. The CFTC's preparation to approve the first U.S. framework for perpetual futures will pull a significant share of offshore derivatives volume into regulated venues, requiring infrastructure that can settle cross-chain in real-time without custodial chokepoints. Rollups, by design, are not suitable for this task. Headlines of the Week By Francisco Rodrigues Recent 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 Decline Following the rsETH Exploit Aave's TVL market share has dropped significantly after the KelpDAO rsETH exploit, which froze markets and triggered deposit withdrawals. The AAVE token has also seen a substantial decline, reflecting bad debt risk and reputational costs.