I like Trinity 4GB Slim unit's for DemoN as you can use the 4GB for XBL (disable 4GB on DemoN NAND) then use a NON-MS drive on the retail NAND so it isn't recognized. If 4GB isn't enough you can use a 32GB flash drive. You can of course use two separate internal drives and swap them out when switching NAND's.
As far as updates, USB is the way to go. I know a lot of people who update over DVD CFW without a problem however it is always recommended to revert to stock.
Now, saying that, here is a trick you can use *most of the time. With JRunner you can create a new retail NAND image thus never having to actually run the official update. You will have to install avatar/kinect files though. For instance, if you are on 16197 retail and want to update the 16202 retail you would dump your 16197 NAND with JRunner, create a new 16202 retail NAND, flash it, and you are done.
One downside to this (if you want to call it that) is that your LDV does not change so that could be a XBL "risk".
*The only time this wouldn't work is if the latest update patches the CPU (like 14699 to 14717 to 15572). In this case you would have to run the official update so that the CPU is patched.