How to use update & DLC in rpcs3?

Of course it is illegal to share it. You can download all games, dlcs and updates directly from PSN servers, doesn't mean it's legal to share them since you should only have access upon purchase. Plus they have copyrighted content, doesn't matter if it "works" or not.

You can't have the disc game inside dev_hdd0 as I've said. You may corrupt the game, specially if it writes to the same directory.

How do you check if the update worked? Even if you update the game, if it's a disc game it will still be listed as v1.00 since discs never get updated themselves.