Hi Venkatesh,
The workflow built-in to DTM is designed to leverage the separate Staging and Production library files. Your production site(s) should link to the production version of the Embed code, and your lower environments - dev, test, UAT, staging, etc. - should all link to the staging version of the Embed code - regardless of which hosting option you choose (external, FTP, or Library Download).
1. Most DTM clients use one of the internal hosting options: either FTP or Library Download. There's no reason not to use FTP instead of Amazon, unless you are unable to host the library files on your own architecture for some reason.
2. Not sure how you plan to use conditional logic to check your environment "referring" to the Staging and Production library files. The Staging and Production versions of the files should each reside somewhere on your architecture when using the FTP hosting option.
3. Yes, that's correct. When you choose the FTP hosting option for the library files, the system will send any code changes to the location specified in the settings screen. Any changes you make in the user interface will be reflected in the library files and sent via FTP delivery to your architecture.
4. The only limitations we run into are with client environments. In other words, if your company has no limitations on receiving the library files via FTP delivery, then there are no limitations to speak of.
Hope that helps!