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 on how Ethereum’s L2 strategy is failing due to a fundamental design flaw.
- Top headlines institutions should be aware of by Francisco Rodrigues.
- Aave’s market share falls after rsETH exploitation in the Chart of the Week.
-Alexandra Levis
Expert insight
Protecting the people who build DeFi infrastructure
By Jennifer Rosenthal, Communications Manager, DeFi Education Fund
There has been a consistent uptrend in traditional finance companies announcing DeFi-related initiatives, and it is exciting that these companies are embracing technological innovations that will serve as infrastructure for 21st century finance. There also seems to be a growing understanding that open source, permissionless, programmable, non-custodial, globally available and interoperable technology presents major upgrades to certain parts of the financial system.
If you are new to decentralized finance (DeFi), intend to trust DeFi, or want to connect your customers with DeFi, we at the DeFi Education Fund, a non-partisan, 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 believe are worth defending:
- Protection of software developers and infrastructure
- Preservation of self-sufficiency
- Advocates open access and interoperability
- Championing permissionless Blockchain infrastructure and DeFi markets
- Supporting clear laws and policies
For months, my team has engaged in productive bipartisan, bicameral discussions with members of Congress. We have been impressed by how many congressional leaders have engaged productively and in good faith to build legislation that reflects a fundamental understanding of neutral, decentralized technology. Software developer protection has come up as a topic of conversation in recent market structures and broader crypto policy discussions. Why? A majority of industry participants agree that if we are going to use DeFi, we need to protect the people who build it.
For example Representatives Scott Fitzgerald (R-WI), Ben Cline (R-VA), and Zoe Lofgren (D-CA) on February 26, 2026 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 criminal code under S96 misclassification – from misclassification S96. 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 interpretation of the law.
In discussing the bill, Rep. Scott Fitzgerald (WI-05): “For years, innovators and software developers have been caught in the crosshairs of 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 implement blockchain software and those who actually move or manage legal funds domestically, and that provides legal funds domestically. enforcement to focus on genuine criminal activity rather than chilling American technological leadership.”
Like the early Internet in the 1990s, blockchain technology is a new innovation that is evolving faster than existing regulation. Engineers developing open, disintermediated systems do not fit neatly into financial rules designed for a system that presupposes the existence of intermediaries.
As more individuals and businesses interact with decentralized infrastructure, our collective voice can play a constructive role in shaping thoughtful and sustainable policy outcomes. We should jointly 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 tools and technology seriously, and I hope you will join in defending the political principles that enable DeFi to be built and used.
Principled perspectives
Ethereum’s scaling problem was never about throughput
By Alexis Sirkia, Chairman and Co-Founder, Yellow Network
Vitalik Buterin recently admitted that most Layer 2 networks fragment Ethereum instead of scaling it. He is right, but the diagnosis does not go deep enough. The rollup model would never deliver aggregate scale because it was designed around the wrong assumption: that Ethereum’s limitation was throughput, when the actual limitation 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. On paper, it increases capacity. In practice, it produced dozens of isolated pools of liquidity that cannot interact without routing assets through bridging infrastructure. Concentration is stark: Base and Arbitrum now capture 77% of all L2 decentralized finance (DeFi) total value locked (TVL), while usage across smaller rollups has fallen 61% since June 2025. The long tail is collapsing and what capital remains is further fragmented. Bridge infrastructure has bled $2.5 billion since 2021 for a simple reason: every time value moves between rollups, it passes through a choke point. Attackers don’t have to break the chains on both sides, they just have to compromise what’s in between.
The industry responded to each bridge exploitation by building better bridges. While that instinct was logical at the time, it was wrong. The vulnerability is not in the bridge implementation. It is in the premise that value must pass through an intermediary at all. State channels eliminate this premise entirely by allowing participants to make off-chain peer-to-peer transactions, with the base layer serving as the enforcement mechanism rather than the transaction processor. Settlement only affects the blockchain once the transaction on the state channel is complete, and either party can invoke on-chain enforcement at any point if the counterparty misbehaves.
This is not an incremental improvement of 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 connect them again, 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 US framework for perpetual futures, which will draw a meaningful share of the $14 trillion in offshore derivatives into regulated venues. To put the magnitude of this shift into context, US-regulated platforms currently handle only 1.6% of the global volume of crypto derivatives. The infrastructure that absorbs even a fraction of the remaining 98.4% must be settled across the chain in real time without passing through choke points. By design, rollups are not candidates for the job.
21Share’s prediction that most L2s won’t survive 2026 feels pessimistic, but the reason matters more than the timeline. Rollups couldn’t deliver aggregate scale because they treated Ethereum’s limitation as a throughput problem. The market is starting to price in that the real constraint was always trust in the middle layer, and the infrastructure that completely eliminates that layer is where capital and developers will migrate.
This week’s headlines
By Francisco Rodrigues
This week’s headlines highlight that while the bridge between traditional finance and the crypto sector continues to grow, the devastation caused by smart contract exploits is hitting the market.
Chart of the week
Aave’s market share slips after rsETH exploitation
Aave’s TVL market share has fallen sharply from ~51.5% in February to ~39% today following the KelpDAO rsETH exploit on April 18, which froze the rsETH markets and triggered deposit withdrawals. Active loan share proved stickier, falling only ~2% (54% to ~52%) as existing borrowers could not relax easily. The AAVE token is down ~50% from its peak in January, pricing in both the risk of bad debt and the reputational cost of being DeFi lending’s main venue when a collateral asset failed.
Listen. Read. Clock. Engage.
Note: The views expressed in this column are those of the author and do not necessarily reflect the views of CoinDesk, Inc., CoinDesk Indices, or its owners and affiliates.
