Welcome to Crypto Long & Short, our institutional newsletter. This week, we focus on the following topics: - Expert Insights by Alexandra Levis Protecting DeFi Infrastructure Builders By Jennifer Rosenthal, Chief Communications Officer at DeFi Education Fund The consistent growth in traditional finance companies embracing DeFi-related initiatives is exciting, as it signifies the adoption of technological innovations that will form the backbone of 21st-century finance. There's a growing 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 decentralized finance (DeFi) or looking to leverage DeFi for their customers, the DeFi Education Fund, a nonpartisan nonprofit organization, invites you to join efforts 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 members of Congress, impressed by the willingness of Congressional leaders to build legislation that reflects a neutral, decentralized technology understanding.
The protection of software developers has emerged as a topic in market structure and broader crypto policy discussions. The majority of industry participants agree that protecting those who build DeFi is crucial for its growth. For instance, on February 26, 2026, Representatives Scott Fitzgerald (R-WI), Ben Cline (R-VA), and Zoe Lofgren (D-CA) introduced the Promoting Innovation in Blockchain Development Act of 2026 (PIBDA) to safeguard software developers from inappropriate misclassification under criminal code Section 1960.
PIBDA clarifies that Section 1960 applies only to those controlling customer assets and transmitting funds on behalf of customers, aligning the statute with congressional intent and the Treasury Department's long-standing regulatory interpretation. In discussing the bill, Rep.
Scott Fitzgerald (WI-05) stated: "Innovators and software developers have been unfairly targeted by an aggressive regulatory approach. The Promoting Innovation in Blockchain Development Act differentiates between developers of blockchain software and those who manage funds, providing legal clarity, protecting innovation, and enabling law enforcement to focus on genuine criminal activity rather than stifling American technological advancement." 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 a system that assumes intermediaries. As more individuals and companies interact with decentralized infrastructure, our collective voice can shape thoughtful policy outcomes.
We should support legislative and regulatory initiatives that promote clarity, reduce uncertainty, and enable responsible participation across both centralized and decentralized markets. Thank you for taking DeFi's tools and technology seriously, and we hope you will join us in defending the principles that make DeFi possible.
Principled Perspectives Ethereum's Scaling Issue Was Never About Throughput By Alexis Sirkia, Chairman and Co-Founder of Yellow Network Vitalik Buterin recently acknowledged that most Layer 2 networks are fragmenting Ethereum rather than scaling it. The diagnosis, however, does not go deep enough. The rollup model was never designed to deliver unified scale because it was based on the wrong assumption: that Ethereum's limitation was throughput, when the actual constraint was how value moves between participants.
Rollups addressed congestion by creating parallel execution environments, each processing transactions independently and posting compressed proofs back to the base layer. In theory, this increases capacity. In practice, it resulted in dozens of isolated liquidity pools that cannot interact without routing assets through bridge infrastructure.
The concentration is stark: Base and Arbitrum now capture 77% of all L2 DeFi total value locked (TVL), while usage across smaller rollups has declined 61% since June 2025. The long tail is collapsing, and the remaining capital is fragmenting further. Bridge infrastructure has lost $2.5 billion since 2021 because every time value moves between rollups, it passes through a custodial chokepoint. Attackers do not need to compromise the chains on either side; they just need to compromise what sits in between.
The industry responded to each bridge exploit by building better bridges, which, although logical at the time, was the wrong approach. The vulnerability is not in the bridge implementation but in the premise that value needs to pass through an intermediary at all. State channels eliminate this premise entirely by allowing participants to transact peer-to-peer off-chain, with the base layer serving as the enforcement mechanism rather than the transaction processor.
Settlement touches the blockchain only once state-channel transacting finishes, and either party can invoke on-chain enforcement at any point if the counterparty misbehaves. This is not an incremental improvement on the rollup model but a rejection of the assumption that created the fragmentation in the first place. Where rollups multiply execution environments and then try to reconnect them, state channels keep participants connected from the start and only engage the base layer when finality is needed.
The CFTC is preparing to approve the first U.S. framework for perpetual futures, which will bring a significant share of $14 trillion in offshore derivatives volume into regulated venues.
To put this shift into context, U.S.-regulated platforms currently handle just 1.6% of global crypto derivatives volume. The infrastructure that absorbs even a fraction of the remaining 98.4% needs to settle cross-chain, in real time, without passing through custodial chokepoints.
Rollups, by design, are not candidates for the job. The prediction by 21Shares that most L2s won't survive 2026 may seem pessimistic, but the reason is more important than the timeline.
Rollups failed to deliver unified scale because they treated Ethereum's constraint as a throughput problem. The market is starting to recognize that the real constraint was always trust at the intermediary layer, and the infrastructure that eliminates that layer entirely is where capital and builders will migrate. Headlines of the Week By Francisco Rodrigues This week's headlines highlight the growth of bridges between traditional finance and the crypto sector, alongside the impact of smart contract exploits on the market. Chart of the Week Aave's Market Share Declines Following rsETH Exploit Aave's TVL market share has dropped significantly from ~51.5% in February to ~39% today, following the April 18 KelpDAO rsETH exploit, which froze rsETH markets and triggered deposit withdrawals.
Active loan share remained relatively stable, falling 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.
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