A major unforced error in crypto is treating technical dashboards as financial dashboards. Nowhere is this as obvious as with TVL of lending protocols. TVL is NOT a substitute for accounting!

Let’s look at TVL defined as “Value of all coins held in smart contracts of the protocol”, and how it would treat a bank with the following balance sheet:
Deposits (a liability): $100m
Loans (an asset): $80m
Reserves (an asset): $20m
Equity: $10m
The TVL of this simplified balance sheet would show up as:
$100m deposits - $80m loans + $10m equity = $30m TVL
Does that feel accurate to you? It should not, because it structurally undercounts economic activity.
In fact, TVL - a technical metric - is treating the bank’s largest asset (its loan book) as a liability and largest liability (its deposits) as an asset!
The problem is one of using the wrong tool for the job. TVL counts how many tokens are in a smart contract or group of affiliated smart contracts. That’s it. In its most simple form, TVL is mostly just counting the reserve ratio of the bank (or lending protocol).
TVL is not a substitute for actual accounting, and people need to understand this.
A deposit on Aave/Morpho/SparkLend/Compound/Euler/Curvance is a liability to that protocol or pool. You could put $1 trillion in deposits onto one of those platforms and TVL would become $1 trillion. But that’s not an indication of economic activity!
Now imagine $999.999 billion of that got lent out. TVL has crashed from $1 trillion to $1 million. Looks bad on a chart, right? But now we’re seeing economic activity!
There is a reason why TVL is not used outside of crypto - it is a technical metric, not a financial one, and any overlap is coincidental and concentrated in very basic protocols like DEXes.