Welcome to our institutional newsletter, Crypto Long & Short. This week:
- Jennifer Rosenthal on the need to protect the people who actually build DeFi infrastructure.
- Alexis Sirkia explains how Ethereum’s L2 strategy is failing due to a fundamental design flaw.
- The main headlines that institutions should pay attention to by Francisco Rodrigues.
- Aave Market Share Drops After rsETH Exploit on the Week Chart.
-Alexandra Levis
Expert Perspectives
Protect people who build DeFi infrastructure
By Jennifer Rosenthal, Director of Communications, DeFi Education Fund
There has been a steady upward trend in traditional financial companies announcing DeFi-related initiatives, and it is exciting to see these companies adopting technological innovations that will serve as the infrastructure for 21st century finance. There also appears to be a growing understanding that open source, permissionless, programmable, non-custodial, globally accessible and interoperable technology presents important improvements for certain parts of the financial system.
If you are new to decentralized finance (DeFi), intend to rely on DeFi, or want to connect your customers with DeFi, we at DeFi Education Fund, a non-partisan and nonprofit organization, invite you to join us in helping protect the technology and infrastructure that make it valuable. There are some high-level policy goals that we think are worth defending:
- Protecting software developers and infrastructure
- Preserve self-custody
- Advocate for open access and interoperability
- Defense of Permissionless Blockchain Infrastructure and DeFi Markets
- Support clear laws and policies
For months, my team has engaged in productive bipartisan and bicameral discussions with members of Congress. We have been impressed by the number of congressional leaders who have engaged productively and in good faith to craft legislation that reflects a fundamental understanding of neutral and decentralized technology. Protections for software developers have emerged as a topic of conversation in recent market structures and broader crypto policy debates. Because? Most industry participants agree that if we are going to use DeFi, we have to protect the people who build it.
For example, on February 26, 2026, Representatives Scott Fitzgerald (R-WI), Ben Cline (R-VA), and Zoe Lofgren (D-CA) introduced the bipartisan Promoting Innovation in Blockchain Development Act of 2026 (PIBDA) to protect software developers, who write code but do not control other people’s money, from inappropriate misclassification under Section 1960 of the penal code. PIBDA clarifies that section 1960 applies only to those who control client assets and transfer funds on behalf of clients, aligning the statute with Congressional intent and the Treasury Department’s longstanding regulatory interpretation.
Discussing the bill, Representative Scott Fitzgerald (WI-05) said: “For years, software innovators and developers have been caught in the crosshairs of an aggressive regulatory approach that treats them as 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-awaited legal clarity, protects innovation here at home, and allows law enforcement to focus on genuine criminal activity at home. instead of cooling American technology leadership.”
Like the Internet in the early 1990s, blockchain technology is a novel innovation that is evolving faster than existing regulation. Engineers who develop open, intermediary-less systems do not fit neatly into financial regulations designed for a system that assumes the existence of intermediaries.
As more people and businesses engage with decentralized infrastructure, our shared voice can play a constructive role in shaping thoughtful and lasting policy outcomes. We should collectively support legislative and regulatory initiatives that foster clarity, reduce uncertainty, and enable responsible participation in centralized and decentralized markets.
Thank you for taking DeFi tools and technology seriously, and I hope you will join us in defending the political principles that make the building and use of DeFi possible.
Principled Perspectives
Ethereum’s scaling problem was never about performance
By Alexis Sirkia, President and Co-Founder of Yellow Network
Vitalik Buterin recently admitted that most Layer 2 networks are sharding Ethereum instead of scaling it. You are right, but the diagnosis is not deep enough. The cumulative model was never going to offer unified scaling because it was designed around the wrong assumption: that Ethereum’s limitation was performance, when the real constraint was always how value moves between participants.
Rollups addressed congestion by creating parallel execution environments, each processing transactions independently and publishing compressed tests to the base layer. On paper, that increases capacity. In practice, it produced dozens of isolated liquidity pools that cannot interact without routing assets through a bridging infrastructure. The concentration is stark: Base and Arbitrum now capture 77% of all L2 decentralized finance (DeFi) total value locked (TVL), while usage in 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 one simple reason: Every time value moves between accumulations, it passes through an escrow bottleneck. Attackers don’t need to break the chains on either side, they just need to compromise what’s in the middle.
The industry responded to each bridge exploitation by building better bridges. That instinct, although logical at the time, was wrong. The vulnerability is not in the implementation of the bridge. It is based on the premise that value must pass through an intermediary. State channels eliminate that premise entirely by allowing participants to conduct peer-to-peer transactions off-chain, with the base layer serving as a compliance mechanism rather than a transaction processor. Settlement touches the blockchain only once transactions on the state channel end, and either party can invoke on-chain law enforcement at any time if the counterparty misbehaves.
This is not an incremental improvement to the cumulative model, but rather a rejection of the assumption that created the fragmentation in the first place. While rollups multiply execution environments and then attempt to reconnect them, state channels keep participants connected from the beginning and only interact with the base layer when a purpose is needed.
The CFTC is preparing to approve the first US framework for perpetual futures, which will bring a significant portion of $14 trillion in offshore derivatives volume to regulated venues. To put the scale of that shift into context, US-regulated platforms currently handle just 1.6% of global crypto derivatives volume. Infrastructure that absorbs even a fraction of the remaining 98.4% must be settled cross-chain, in real time, bypassing custodial lockpoints. Rollups, by design, are not candidates for the position.
21Shares’ prediction that most L2s won’t survive in 2026 seems pessimistic, but the reason matters more than the timeline. The rollups failed to offer unified scaling because they treated the Ethereum restriction as a performance issue. The market is beginning to appreciate that the real limitation was always trust in the middle layer, and infrastructure that eliminates that layer completely is where capital and builders will migrate to.
Headlines of the week
By francisco rodrigues
This week’s headlines highlight that while the bridges between traditional finance and the crypto sector continue to grow, the devastation caused by smart contract vulnerabilities is impacting the market.
Chart of the week
Aave market share drops after rsETH exploit
Aave’s TVL market share has fallen sharply from ~51.5% in February to ~39% today following the April 18 KelpDAO rsETH exploit, which froze rsETH markets and caused deposit withdrawals. The share of active loans proved more difficult, falling only ~2% (54% to ~52%), as existing borrowers could not easily offload. The AAVE token is down ~50% from its January peak, which takes into account both the risk of insolvency and the reputational cost of being the largest place for DeFi lending when a collateral asset fails.
Hear. Read. Look. Engage.
Note: The opinions expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc., CoinDesk Indices or their owners and affiliates.
