In our weekly institutional newsletter, Crypto Long & Short, we discuss the surge of traditional finance firms integrating DeFi initiatives, marking a promising embrace of 21st-century financial technology innovations. The nonpartisan, nonprofit DeFi Education Fund highlights how these open-source and decentralized technologies offer significant advancements to specific areas within the financial system.
For those new to or intending to use DeFi, we invite you to join our efforts in protecting the infrastructure that underpins its value. We emphasize certain policy goals worth defending:
Our team has engaged in bipartisan discussions with Congressional members over several months, noting their serious commitment to understanding and legislating around neutral, decentralized technology. Software developer protections have emerged as a key discussion point in recent crypto policy dialogues due to consensus within the industry on protecting DeFi builders.
For instance, 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. This act seeks to shield software developers from being misclassified under criminal code Section 1960 by clarifying its application solely to those controlling customer assets, aligning with both congressional intent and Treasury guidelines.
Rep. Scott Fitzgerald (WI-05) remarked on the bill: “Innovators and software developers have long been unfairly targeted by stringent regulatory measures. The Promoting Innovation in Blockchain Development Act distinguishes between blockchain developers and fund managers, offering necessary legal clarity, safeguarding domestic innovation, and allowing law enforcement to focus on actual criminal activities rather than stifling technological progress.”
Blockchain technology, similar to the early internet of the 1990s, is evolving faster than current regulations can keep pace with, as engineers working on open systems do not fit traditional financial regulatory frameworks designed for intermediary-based models.
As decentralized infrastructure gains traction among individuals and companies, our collective voice can help shape thoughtful policies. We advocate for legislative and regulatory support that promotes clarity, diminishes uncertainty, and encourages responsible participation in both centralized and decentralized markets.
In another section, Alexis Sirkia of Yellow Network discusses Vitalik Buterin’s admission about Layer 2 networks fragmenting rather than scaling Ethereum. This stems from the flawed assumption that Ethereum’s limitation was throughput instead of value transfer between participants. Rollups create isolated environments for transaction processing but lead to fragmented liquidity pools requiring bridge infrastructure for interaction.
The industry responded to each bridge exploit by building more bridges, an approach now recognized as misguided since the flaw lies in assuming intermediaries are necessary. State channels remove this requirement by enabling peer-to-peer transactions off-chain, with blockchain serving primarily for enforcement rather than processing.
As the CFTC prepares to approve a U.S. framework for perpetual futures, it will shift significant offshore derivatives volume into regulated venues, highlighting the need for cross-chain settlements without custodial intermediaries. Rollups, inherently unsuited for this task, have failed due to their flawed design assumptions.
A21Shares’ prediction that most L2 networks may not survive past 2026 underscores a market recognition of trust issues at intermediary layers as critical constraints, pointing towards infrastructure that eliminates these layers as future focal points.
This week’s headlines reveal an expansion in bridges between traditional finance and crypto, alongside the impact of smart contract exploits. Aave’s TVL share dropped from ~51.5% in February to ~39% following a KelpDAO exploit on April 18, which froze markets and triggered withdrawals. While active loans decreased slightly (54% to ~52%), indicating borrower stickiness, the AAVE token fell ~50% from its January peak due to perceived bad debt risks and reputational damage as DeFi lending’s largest platform during the collateral failure.
Note: The opinions expressed in this column are solely those of the author and do not necessarily reflect those of CoinDesk, Inc., CoinDesk Indices, or their owners and affiliates.