That is a very odd set of symptoms.

To troubleshoot your setup, you might want to try these steps:
1. Disconnect all ground and button input wires from the P2 KADE miniArcade 2.0.
2. Re-check the P2 PCB for any solder bridges or stray wire strands that could cause a short.
3. Plug in your P2 PCB (USB only, no ground or button wires) to XBox P1 and see if it boots up properly.
- If it boots up properly, skip to step 4.
- If you see the same "HDD click and black screen" problem as before, the problem is with the encoder.
-- There could be a short that you haven't found
or the AVR could have suffered ESD (electrostatic discharge) damage
or perhaps the AVR could be incorrectly mounted to the daughterboard. (i.e. shifted one pin forward/backward on the riser pins)
-- If the AVR is correctly mounted and you can't find a short using your multimeter, that leaves replacing the AVR.
Unfortunately, MattairTech stopped taking orders as of July 5, 2020 so you won't be able to use an
MT-DB-U4 unless and until he starts taking orders again.

4. Plug in both P1 (fully wired) and P2 (USB only, no ground or button wires) encoders and boot up the XBox.
- If it doesn't boot properly,

.
5. Connect the ground wire(s) to the P2 encoder and boot up the XBox.
- If it doesn't boot properly, your wiring problem is somewhere in the ground wire daisy-chain.
6. Connect two or three input wires to the P2 encoder, boot up the XBox, and test those inputs.
- If it doesn't boot/test properly, your wiring problem is with one of those inputs.
- Repeat step 6 until all input connections are made and tested.
Scott