One more question, it doesn't even matter as far as displaying the proper % of my battery left, or is that done at a hardware level?
I believe all that rockbox gets from the hardware is the voltage of the battery.
It also has an array of voltages when the battery is at 0%, 10% and so on upto 100%.
To work out the percentage it uses those values to interpolate the percentage for the current battery voltage. The capacity setting of the battery has no effect on these values.
Currently the nano uses the same voltage array as the iriver H series which isn't quite correct. You might have noticed the battery never makes it to 100% even when fully charged.
I'd guess to find the best capacity setting you could charge the player then start using it and time how long it takes to go flat. Then recharge it and play with the capacity until the estimated time matches your measured time.