The discussion primarily revolved around the risks associated with the E-Mode category of stablecoins in the AAVE protocol, as highlighted by ChaosLabs. The recent USDC de-peg event, which resulted in significant bad debt, was used as a case study to illustrate these risks. It was noted that the majority of the bad debt on Avalanche during this event was caused by three large E-Mode positions.

ChaosLabs proposed several strategies to mitigate such risks in the future. These included increasing the stablecoin reserve factor, removing assets from the E-Mode category, decreasing the E-Mode Category LT, and placing specific stablecoins in Isolation Mode. Increasing the stablecoin reserve factor was recommended as the most effective method to address stablecoin de-peg risk. This would involve increasing the reserve factor of stablecoins to increase protocol revenue, thereby compensating for the de-peg risk.

However, ChaosLabs also acknowledged the potential drawbacks of these strategies. For instance, removing assets from the E-Mode category could lead to immediate liquidation of positions and a loss of competitive advantage for Aave. Similarly, limiting the supply or borrow caps of stablecoins could decrease asset supply to Non-E-Mode markets and affect the usability and revenue of the protocol. Therefore, any changes should be implemented thoughtfully to balance risk mitigation and usability.

The discussion concluded with an invitation for community feedback on these proposed solutions. ChaosLabs also promised to share a simulation-based evaluation of stablecoin de-peg risk losses and recommend appropriate reserve factor settings in a future post.