Welcome to Crypto Long & Short, our institutional newsletter. This week, we're focusing on the following key points: - Protecting the Creators of DeFi Infrastructure By Jennifer Rosenthal, Chief Communications Officer at DeFi Education Fund The ongoing influx of traditional finance companies into DeFi is a positive development, as it signifies the adoption of technological innovations that will underpin 21st-century finance.
There's a growing recognition that open-source, permissionless, programmable, non-custodial, globally accessible, and interoperable technologies can significantly enhance certain aspects of the financial system. If you're new to decentralized finance or plan to utilize DeFi, the DeFi Education Fund invites you to join us in protecting the technology and infrastructure that give DeFi its value. We've identified several high-level policy objectives that we believe are worth defending. Over the past few months, our team has engaged in productive discussions with members of Congress, and we're impressed by the number of Congressional leaders who have constructively engaged in building legislation that reflects a neutral, decentralized technology.
The protection of software developers has emerged as a topic of conversation in recent market structure and broader crypto policy discussions. The reason is simple: if we're going to leverage DeFi, we must safeguard the people building it. For instance, on February 26, 2026, Representatives Scott Fitzgerald, Ben Cline, and Zoe Lofgren introduced the bipartisan Promoting Innovation in Blockchain Development Act of 2026. This act aims to protect software developers who write code but don't control other people's money from being misclassified under criminal code Section 1960.
The act clarifies that Section 1960 applies only to those who control customer assets and transmit funds on behalf of customers, aligning the statute with congressional intent and the Treasury Department's long-standing regulatory interpretation. When discussing the bill, Rep. Scott Fitzgerald said: 'Innovators and software developers have been unfairly targeted by an aggressive regulatory approach that treats them like criminals. The Promoting Innovation in Blockchain Development Act draws a clear line between those who develop and deploy blockchain software and those who actually move or manage funds.
It provides long-overdue legal clarity, protects innovation, and allows law enforcement to focus on genuine criminal activity rather than stifling American technological leadership.' Similar to the early internet in the 1990s, blockchain technology is a novel innovation evolving faster than existing regulations. Engineers developing open, disintermediated systems don't fit neatly into financial regulations designed for a system that assumes the existence of intermediaries. As more individuals and companies interact with decentralized infrastructure, our collective voice can play a constructive role in shaping thoughtful and durable policy outcomes.
We should collectively support legislative and regulatory initiatives that foster clarity, reduce uncertainty, and enable responsible participation across both centralized and decentralized markets. Thank you for taking DeFi's tools and technology seriously, and I hope you will join us in defending the policy principles that make building and using DeFi possible. Principled Perspectives Ethereum's Scaling Problem 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.
He's right, but the diagnosis doesn't go deep enough. 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 always 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, that increases capacity. In practice, it produced dozens of isolated liquidity pools that can't interact without routing assets through bridge infrastructure.
The concentration is stark: Base and Arbitrum now capture 77% of all L2 DeFi total value locked, while usage across smaller rollups has declined 61% since June 2025. The long tail is collapsing, and the capital that remains is fragmenting further. Bridge infrastructure has lost $2.5 billion since 2021 for a simple reason: every time value moves between rollups, it passes through a custodial chokepoint.
Attackers don't need to break 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. That instinct, while logical at the time, was wrong.
The vulnerability isn't in the bridge implementation; it's in the premise that value needs to pass through an intermediary at all. State channels eliminate that 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 isn't an incremental improvement on the rollup model but rather 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 pull a meaningful share of $14 trillion in offshore derivatives volume into regulated venues. To put the scale of that shift in 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 21Shares prediction that most L2s won't survive 2026 feels pessimistic, but the reason matters more than the timeline. Rollups failed to deliver a unified scale because they treated Ethereum's constraint as a throughput problem. The market is starting to price in 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 that while the bridges between traditional finance and the crypto sector keep growing, the devastation caused by smart contract exploits is hitting the market. Chart of the Week Aave's Market Share Slides After rsETH Exploit Aave's TVL market share has dropped sharply 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 proved stickier, falling only ~2% (54% to ~52%), as existing borrowers couldn't easily unwind. The AAVE token is down ~50% from its January peak, pricing in both bad debt risk and the reputational cost of being DeFi lending's largest venue when a collateral asset failed. Listen.
Read. Watch. Engage.
Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc., CoinDesk Indices, or its owners and affiliates.