Thanks for getting the ball rolling on this. Focusing on the points (that I’ve also discussed here) that:
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the SM is overexposed to AAVE
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Auctioning AAVE in the event of a Shortfall can lead to front running, which can have an adverse effect price, causing a greater amount to be auctioned
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30% shortfall coverage is not scalable and greater capital efficiency is needed
I believe that the SM should remove AAVE altogether, as there is seemingly no situation in which a large deficit could be covered by the fund without sending the token to 0 and creating a minting death spiral. LP tokens are a bit better, and I agree that they should be diversified. Including GHO makes sense, as long as the amount that is allowed to be deposited into the SM scales with GHO liquidity on DEXs so as to not risk depegging in the case of an Auction.