Welcome to Crypto Long & Short, our institutional newsletter. This week, we focus on the need to safeguard the people building DeFi infrastructure. As traditional finance companies increasingly engage with DeFi, it's crucial to protect the technology and infrastructure that underpin it.
The DeFi Education Fund, a nonpartisan nonprofit, invites you to join us in defending key policy objectives. We've participated in productive discussions with Congressional leaders to build legislation that reflects a fundamental understanding of decentralized technology.
Protecting software developers is essential, as they write code but do not control users' money. The Promoting Innovation in Blockchain Development Act aims to clarify that Section 1960 applies only to those controlling customer assets.
Meanwhile, Ethereum's L2 strategy is facing challenges due to a fundamental design flaw. The rollup model was designed to address congestion but has led to fragmentation, with dozens of isolated liquidity pools. State channels offer a potential solution by allowing peer-to-peer transactions off-chain, with the base layer serving as the enforcement mechanism.
The CFTC is preparing to approve the first US framework for perpetual futures, which will require infrastructure that can settle cross-chain in real-time without custodial chokepoints. Rollups are not suited for this task, and the market is starting to price in the limitations of this approach. We also highlight the devastating impact of smart contract exploits on the market and Aave's TVL market share decline following the rsETH exploit.