ETH DeFi Correlation

## ETH DeFi Correlation — Full Methodology

### DeFi TVL Signal

1. **Total Value Locked:** Monitor aggregate DeFi TVL across Ethereum (sourced from DeFi Llama)

2. **TVL trend:** 7-day average TVL must be rising for ≥ 14 consecutive days

3. **TVL acceleration:** Current week's TVL growth rate must exceed the prior week's growth rate

### Correlation Filter

1. **ETH/DeFi index correlation:** 30-day rolling correlation between ETH price and DeFi Pulse Index (DPI) must be > 0.75

2. **Correlation rising:** The correlation must be higher than its 60-day average

### Entry Criteria

1. DeFi TVL trending up with accelerating growth

2. ETH/DeFi correlation > 0.75 and rising

3. ETH price above its 21-day EMA

4. Enter long at the daily close

### Exit Rules

- **TVL reversal:** Exit if 7-day average TVL declines for 7 consecutive days

- **Correlation breakdown:** Exit if ETH/DeFi correlation drops below 0.50

- **Trailing stop:** 15% below the highest close (crypto volatility)

- **Time stop:** Reassess after 30 days

### Position Sizing

- Allocate 3–8% of portfolio to ETH via this strategy

- This is a narrative-driven strategy — size conservatively

### Best Market Conditions

Works best during DeFi growth phases when new protocols launch, yield farming opportunities emerge, and capital flows into Ethereum's DeFi ecosystem. The 2020 "DeFi Summer" and 2024 restaking narrative were ideal. Underperforms during crypto winters when TVL collapses.

### Backtest Notes

Tested on ETH/USD + DeFi TVL data from Jun 2020 to Dec 2024. TVL data sourced from DeFi Llama. The correlation filter avoided false signals during periods when ETH traded on macro factors rather than DeFi fundamentals.