Welcome to Crypto Long & Short, our institutional newsletter. This week, we explore crucial topics in the DeFi space. Expert Insights Protecting DeFi Infrastructure Builders By Jennifer Rosenthal, DeFi Education Fund Chief Communications Officer The growth of traditional finance companies embracing DeFi-related initiatives is promising, as it signifies the adoption of innovative technologies that will underpin 21st-century finance. Open-source, permissionless, programmable, noncustodial, globally accessible, and interoperable technologies offer significant upgrades to certain parts of the financial system.
If you're new to DeFi, plan to use it, or wish to connect your customers to it, we invite you to join us at the DeFi Education Fund in safeguarding the technology and infrastructure that make DeFi valuable. Key policy objectives we believe are worth defending include protecting software developers who do not control others' money from being misclassified under criminal codes.
Recently, the bipartisan Promoting Innovation in Blockchain Development Act of 2026 was introduced to clarify that certain laws apply only to those controlling customer assets and transmitting funds on behalf of customers. This aligns with congressional intent and long-standing regulatory interpretations, providing legal clarity and protecting innovation.
Like the early internet, blockchain technology is evolving faster than existing regulations. Engineers developing open, disintermediated systems don't 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. Principled Perspectives The Flaw in Ethereum's Scaling Strategy By Alexis Sirkia, Chairman and Co-founder, Yellow Network Vitalik Buterin 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 wrong assumption that Ethereum's limitation is throughput, when the actual constraint is how value moves between participants.
Rollups increased capacity by creating parallel execution environments but produced isolated liquidity pools that can't interact without routing assets through bridge infrastructure. This concentration and fragmentation have led to significant losses due to bridge exploits.
The industry's response to build better bridges was misguided, as the vulnerability lies in the premise that value needs to pass through an intermediary. State channels, on the other hand, allow peer-to-peer transactions off-chain, eliminating the need for intermediaries and reducing vulnerability to exploits.
The shift towards regulated venues for perpetual futures will require infrastructure that can settle cross-chain in real time without custodial chokepoints. Rollups, by design, are not suited for this task. The market is recognizing that the real constraint was trust at the intermediary layer, and infrastructure that eliminates this layer will attract capital and builders. Headlines of the Week By Francisco Rodrigues Recent headlines highlight the growing connection between traditional finance and crypto, as well as the impact of smart contract exploits on the market.
Chart of the Week Aave's Market Share Declines After Exploit Following the rsETH exploit, Aave's TVL market share dropped sharply, and the AAVE token has lost significant value, reflecting both bad debt risk and reputational costs.