Set User to Connections. It will then loop the action through all the connections of the user that triggered the action. Yes, you will have to create the notification 500+ times unless you create a single global notification (set Global parameter to 1). In the case of connections I don't think you've much of a choice but to replicate it 500+ times.

Replication is basically how notifications are handled in most activity streams. The problem with CB Activity is it doesn't use a relationship table. So the full notification row is replicated 500+ times instead of a simple 2 column table that says xyz user ids have access to xyz notification. A relationship table usage is planned in a later release so it'd create 1 notification and 500+ relationships to that notification, which would significantly reduce the SQL storage and speed up the process of notifying 500+ people.

GJ notifications are explicitly group access checked. They can't see the notification if they're not an active member of the group. What that means is you can send a global notification with an asset of "groupjive.group.GROUP_ID" for example and it'll only be visible to members of that group.

Regardless of this the database usage of CB Activity is well indexed and optimized (there's always room for improvement). You can have hundreds of thousands of notifications and it'll continue to work perfectly fine (I've personally tested 100,000 notifications; no performance loss). So don't be afraid to use replication, which will migrate to relationship table usage once implemented.

You don't need to set any variables to loop. Simply set User to Connnections and it'll send the notification to the connections of the user that triggered the action. I guess depending on what trigger you're acting on it could be fired twice. You'd need to provide all the details regarding your auto action configuration for me to suggest anything further.

Also, for some reason, it triggers twice.... can I not set the auto action to react on only one trigger instead of then updating 500+ notifications again?

If you don't want duplicate notifications then be sure the "Load By" parameter is set how you want it to check for an existing entry. If it finds an existing entry it'll just update it instead of making a new one.