Welcome to our institutional newsletter, Crypto Long & Short. This week:
- Jennifer Rosenthal on the need to protect the people actually building DeFi infrastructure.
- Alexis Sirkia explains how Ethereum’s L2 strategy fails due to a fundamental design flaw.
- Institutions making headlines should pay attention, according to Francisco Rodrigues.
- Aave Market Share Falls After rsETH Mining in Weekly Chart.
-Alexandra Lévis
Expert Views
Protecting the people building DeFi infrastructure
By Jennifer Rosenthal, Director of Communications, DeFi Education Fund
There has been a steady upward trend among traditional financial companies announcing DeFi-related initiatives, and it is exciting that these companies are 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 technologies present major improvements for parts of the financial system.
If you are new to decentralized finance (DeFi), intend to rely on DeFi, or want to connect your customers to DeFi, we at the DeFi Education Fund, a non-partisan, non-profit organization, invite you to join us in helping protect the technology and infrastructure that make it valuable. We believe that some high-level policy objectives are worth defending:
- Protecting software developers and infrastructure
- Preserve self-guarding
- Advocacy for open access and interoperability
- Defending permissionless blockchain infrastructure and DeFi markets
- Support clear laws and policies
For months, my team has engaged in productive bipartisan, 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, decentralized technology. Protecting software developers has become a topic of conversation in recent market structure and broader crypto policy discussions. For what? The majority of industry players agree that if we want to use DeFi, we need to protect the people who build it.
For example, on February 26, 2026, Reps. Scott Fitzgerald (R-WI), Ben Cline (R-VA), and Zoe Lofgren (D-CA) introduced the bipartisan Promoting Innovation in Blockchain Development Act (PIBDA) of 2026 to protect software developers – who write code but do not control other people’s money – from improper classification under Penal Code Section 1960. only to those who control customer assets and transmit funds on behalf of customers, thereby aligning the law with Congressional intent and the Treasury Department’s long-standing regulatory interpretation.
In discussing the bill, Rep. 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 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 here at home and allows law enforcement to focus on real criminal activities rather than chilling America’s technological leadership.
Like the beginnings of the Internet in the 1990s, blockchain technology is an innovation that is evolving more quickly than existing regulations. Engineers developing open, disintermediated systems do not fit neatly into financial regulations designed for a system that assumes the existence of intermediaries.
As more individuals and businesses interact with decentralized infrastructure, our shared voice can play a constructive role in shaping thoughtful and sustainable policy outcomes. We must collectively support legislative and regulatory initiatives that promote 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 policy principles that make the creation and use of DeFi possible.
Principled Perspectives
Ethereum’s scaling problem was never about throughput
By Alexis Sirkia, president and co-founder, Yellow Network
Vitalik Buterin recently admitted that most layer 2 networks are fragmenting Ethereum rather than scaling it. He is right, but the diagnosis is not thorough enough. The rollup model was never able to provide a unified scale because it was designed around a flawed assumption: that Ethereum’s limit was throughput, while the real constraint was always how value moves between participants.
Rollups solved congestion by creating parallel execution environments, each processing transactions independently and publishing the compressed proofs to the base layer. On paper, this increases capacity. In practice, this has produced dozens of isolated liquidity pools that cannot interact without routing assets through bridging infrastructure. The concentration is stark: Base and Arbitrum now capture 77% of all decentralized finance (DeFi) L2 total value locked (TVL), while usage in smaller pools has declined by 61% since June 2025. The long tail is collapsing and the remaining capital is becoming more fragmented. Bridge infrastructure has lost $2.5 billion since 2021 for a simple reason: Every time the value moves between rollups, it passes through a conservation chokepoint. Attackers don’t need to break the chains on one side or the other, they just need to compromise what’s in between.
The industry responded to each bridge feat by building better bridges. This instinct, although logical at the time, was wrong. The vulnerability does not lie in the implementation of the bridge. The principle is that value must pass through an intermediary. State channels eliminate this entirely by allowing participants to conduct peer-to-peer transactions off-chain, with the base layer serving as the enforcement mechanism rather than the transaction processor. Settlement only hits the blockchain once the state channel transaction is complete, and either party can invoke on-chain enforcement at any time if the counterparty misbehaves.
This is not a progressive improvement of the accumulation model, but rather a rejection of the hypothesis at the origin of the fragmentation. Where rollups multiply execution environments and then attempt 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 attract a significant portion of $14 trillion in offshore derivatives volume to regulated venues. To put the scale of this change in context, U.S.-regulated platforms currently handle just 1.6% of global crypto derivatives volume. Infrastructure that absorbs even a fraction of the remaining 98.4% must sit between chains, in real time, without passing through guard choke points. Rollups, by design, are not candidates for the position.
21Shares’ prediction that most L2s won’t survive to 2026 seems pessimistic, but the reason matters more than the timeline. Rollups failed to provide unified scale because they treated Ethereum’s constraint as a throughput problem. The market is starting to realize that the real constraint has always been trust at the middle level, and that infrastructure that completely eliminates this layer is where capital and builders will migrate.
Headlines of the week
By Francisco Rodrigues
This week’s headlines highlight that even as the bridges between traditional finance and the crypto sector continue to grow, the havoc caused by smart contract exploits is hitting the market.
Chart of the week
Aave Market Share Falls After rsETH Mining
Aave’s TVL market share fell sharply from around 51.5% in February to around 39% today following the April 18 KelpDAO rsETH exploit, which froze rsETH markets and triggered deposit withdrawals. The share of active loans proved more resilient, falling only about 2% (from 54% to ~52%), as existing borrowers could not easily exit. The AAVE token is down about 50% from its January high, factoring in both the risk of bad debts and the cost of reputation as the largest DeFi lending venue in the event of a collateral asset default.
Listen. Read. Watch. Get involved.
Note: The opinions 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.
