Luaffyn stands in a corner due to an error in her script. Lore-wise, and logically, she lives in that tavern. Outside the Gray Quarter. Idesa Sadri I've highlighted because, no matter what you call it ('taken in' is a misleading alternative for 'employed') she does undeniably live outside the Gray Quarter, in the house of the Cruel-Seas, no less, proving the law's non-existence. As for Belyn, that's pushing it, but given the existence of Idesa I see no need to really push my point on that one and can let it slide.
I don't give a damn what his reasoning is. He says Dunmer are forced to live in the Gray Quarter, we see in-game that that's not true.
It is a large chunk of one lifespan. The Nords and other races have been there centuries. They also have families, and tonnes of children, compared to the Dunmer's one or two. It's massively unrealistic to think that the Dunmer could match in one lifetime with two or three children at most what the Nords and others have amassed over centuries of whole families working and the added benefit of inheritance.
You keep saying 'taken in' as though it's something other than 'allowed by law to live with.'
No-one in Windhelm mentions any law. Niranye seems to be particularly unaware of its existence, and a number of Dunmer that gripe about their brothers' talk of 'injustice' are equally confused.
Those 'few civilians' are representative of the first wave of Stormcloaks. As said elsewhere in this thread, we have to allow for the fact that Skyrim is scaled-down, so we can see from them that even before Torryg's murder Stormcloaks came from far and wide, across all the areas he currently has control of.
You need a rallying cry, but it doesn't necessarily have to be a duel with the High King, as good as that is for propaganda. The Thalmor are taking people left, right, and centre: surely one of them could have made a martyr, in the manner of the Arnesian War? Ulfric's a creative man - he'd have to be to think up the duel in the first place - and he's not afraid of taking risks, he could have conjured up any number of propaganda coups.
He was a worshipper, or admirer, of Talos, who may well have accepted the duel for the same reasons that Ulfric challenged him: a sentimental respect for the old ways. While it's true that provinces have separate laws, we know from those books featuring the King of Camlorn's arrest that monarchies in the provinces are subservient to the Emperor's legal code, and thus Imperial law would apply to them.