The Layer-2 sector remains stuck in a Darwinian consolidation phase.

This week, two of Ethereum’s more prominent rollup teams — StarkWare and Scroll — announced significant restructurings within days of each other.

Both teams are effectively going back to the drawing board to figure out how and where to find product-market fit. Whether they’ll ever find it is anything but certain.

There is a massive oversupply in available blockspace, and the economics of running a general-purpose L2 without captive demand have become brutal.

As a result, the market is dissolving into two camps: companies with existing distribution funneling demand onto their own chain (Coinbase, Kraken, Robinhood, OKX) and companies without distribution that are building L2 infrastructure for the ones that do (Optimism, zkSync, Arbitrum).

The latter camp is now eating directly into the rollup-as-a-service market, building bespoke enterprise solutions and leaving less room for middleware providers.

What’s notable is that we haven’t seen any M&A activity in this sector yet. But maybe that’s just the market telling you what it thinks about the value of owning the underlying tech without users.

A new chapter: Over the last few weeks, DeFi's leading lending protocol Aave has undergone its most significant technical and organizational overhaul in recent years.

Why it matters: With $26 billion in user deposits, Aave remains the largest protocol in DeFi. With a market share of above 50% it‘s the dominant lending protocol in the industry.

Under competitive pressure: In recent months, however, that lead has come under pressure. Modular lending protocols like Morpho are increasingly establishing themselves as the default infrastructure for onchain asset management solutions, used by players such as Coinbase, Bitwise, and Société Générale. In the last 12 months, Morpho’s market share across major networks has risen from roughly 10% to 16%, while Aave's has stagnated at around 58%.

The V3 trade-off: Much of Aave's dominance is built on V3, its protocol version that has been running since 2022. Put simply, V3 operates a single large lending pool per chain, meaning all collateral assets share the same underlying liquidity. This model proved highly resilient, withstanding multiple market turbulences without accumulating significant bad debt and becoming one of the most trusted protocols in DeFi. However, it also constrained expansion: newer or riskier assets could not be listed alongside blue-chip collateral like BTC or ETH without exposing the entire pool to additional risk.

The V4 fix: V4 preserves shared liquidity while adding a layer of flexibility on top. The new architecture introduces "hubs" that aggregate all user deposits on a given chain, alongside "spokes," which are specialized markets that draw liquidity from this shared pool. Each spoke sets its own rules for which collateral it accepts and at what terms, while tapping into the hub's existing deposits rather than needing to attract its own.

What this unlocks: For institutional participants, this opens new possibilities. Custom spokes can connect directly to qualified custodians, allowing institutions to borrow against assets without moving them onchain. The architecture also expands Aave’s collateral universe, from real-world assets to positions like Uniswap LP tokens, while enabling new lending primitives such as fixed-rate borrowing.

A pivotal moment: The V4 launch coincides with the most significant organizational shake-up in Aave's history. In recent months, disputes over revenue distribution and governance authority have led to the departure of three of the protocol’s most established contributors.

A new deal: The Aave DAO's response came on Sunday with the passage of what is called the "Aave Will Win" proposal, a framework that fundamentally restructures how the protocol is developed and funded. Under the new model, Aave Labs de facto becomes the protocol's primary contributor, absorbing much of the responsibilities of the departing teams. The DAO funds its work. In return, 100% of revenue from all Aave-branded products flows directly to the DAO treasury.

Scaling distribution: Much of that product revenue will come from Aave's expanding distribution channels. A consumer-facing Aave App targets non-crypto users with a simplified savings experience, while Aave Kit lets fintechs and institutions embed Aave directly into their own platforms.

Building the institutional venue: Alongside distribution, Aave Labs intends to invest heavily in Horizon, its dedicated market for real-world assets and institutional lending.

All eyes on V4: Beyond these efforts, scaling Aave V4 remains a central priority. The ongoing rollout follows a security-first approach, with deposit caps being gradually increased over time. In the first two weeks since go-live, the new version has already attracted roughly $30 million in deposits and $10 million in loans.