Defending DeFi Infrastructure and the People Behind It

Welcome to Crypto Long & Short, our institutional newsletter. This week, we focus on the need to safeguard the people building DeFi infrastructure. Jennifer Rosenthal, chief communications officer at the DeFi Education Fund, emphasizes the importance of protecting open-source, permissionless, programmable, noncustodial, globally accessible, and interoperable technology. This is crucial as traditional finance companies increasingly embrace DeFi-related initiatives, recognizing the potential of these technologies to serve as infrastructure for 21st-century finance. Rosenthal highlights the growing understanding that such technologies present significant upgrades for certain parts of the financial system. The DeFi Education Fund invites those new to DeFi, intending to rely on DeFi, or looking to connect customers to DeFi to join in defending the technology and infrastructure that makes it valuable. Key policy objectives include protecting software developers who do not control other people's money from inappropriate misclassification under criminal code. The bipartisan Promoting Innovation in Blockchain Development Act of 2026 aims to clarify that Section 1960 applies only to those controlling customer assets and transmitting funds on behalf of customers. This aligns with congressional intent and the Treasury Department's long-standing regulatory interpretation. In another article, Alexis Sirkia discusses how Ethereum's L2 strategy is failing due to a fundamental design flaw. Sirkia argues that the rollup model was never going to deliver a unified scale because it was designed around the wrong assumption - that Ethereum's limitation was throughput, when the actual constraint was how value moves between participants. The concentration of liquidity in a few large rollups, such as Base and Arbitrum, which now capture 77% of all L2 DeFi total value locked, while usage across smaller rollups has declined, highlights the issue. The long tail is collapsing, and capital is fragmenting further. Bridge infrastructure has been exploited, resulting in significant financial losses. Sirkia suggests that state channels, which allow participants to transact peer-to-peer off-chain with the base layer serving as the enforcement mechanism, could eliminate the need for intermediaries and the associated vulnerabilities. This approach keeps participants connected from the start and only engages the base layer when finality is needed, potentially offering a more secure and scalable solution. The week's headlines also highlight the growing connection between traditional finance and the crypto sector, as well as the impact of smart contract exploits on the market. Aave's market share has dropped sharply following the rsETH exploit, and the AAVE token has fallen significantly, reflecting both bad debt risk and reputational costs.