I think you are right about the actual math. but still 50% decrease for a price drop of 75% is sub-linear.
My point was that arbitrage losses, impremenant loss and all other kind of losses are already embedded in the price of the LP token, which is highly predictable given the prices of the underlying assets (which are of course hard to predict). And the volatility of the LP token is highly predictable given the volatility of the underlying assets. In fact, afaik the volatility is ETH/USDC lp token vs USD is exactly half of ETH volatility.
Also for reference, MakerDAO give higher ltv for their ETH/DAI uniswap v2 lp token wrt ETH (with the same stability fee).
MakerDAO system is different as it has caps, and therefore some of the concerns you expressed in the writeup might be applicable to aave but not to maker. So my comment is only about potential further losses, and whether the loss is sub linear or not.
Obviously I didn’t try to do any rigorous analysis as of yet, but i am curious why one have to understand/analyze all these losses, rather than just analysing the LP token as a black box with 50:50 holdings (with xy=k, and x/y = price), and ignore the fees. All losses are embedded in this black box model to my understanding, and I am trying to see what is it I am missing.
(*) The liquidity considerations you mentioned are also valid, and could change the picture, but at this point I am trying to figure out the loss aspect.