In the discussion, Pauljlei presented a comprehensive methodology for calculating borrow and supply caps on Aave V3, with the aim of mitigating risks, optimizing user experience, and maintaining on-chain liquidity. The methodology is designed to be adaptable, with conservative and aggressive recommendations provided. The conservative approach is driven by local liquidity, while the aggressive approach is driven by global liquidity, and is applied for tokens on the Ethereum mainnet due to its robust liquidator ecosystem.

The methodology takes into account a variety of factors, including potential long attack bounds, local and aggregate liquidity, and total circulating supply. For stablecoins, the methodology recommends 40% of the circulating token supply on-chain for a conservative approach and 60% for an aggressive approach. For non-stablecoins, the minimum value of three or four factors is considered. The methodology also considers the unique characteristics of stablecoins and staking derivative tokens, allowing for high utilization of stablecoins due to capital efficiency considerations, and potentially setting a lower borrow cap for staking assets due to liquidity risks.

Pauljlei also discussed the implementation of supply caps and borrow caps to prevent high probability profitability, taking into account the randomness of price trajectories and supply and demand trajectories. He highlighted the importance of DEX liquidity for liquidators, citing statistics on liquidations on Optimism and Avalanche. The methodology also includes a strategy to counter short manipulation attacks, by calculating the break-even price and determining the total number of borrowed tokens needed to reach this point. Future considerations for the methodology include simulated insolvency risk, liquidator behavior, and staking derivatives. The discussion concluded with an invitation for feedback from the community, indicating an ongoing evolution of the methodology.