Salesforce Data Cloud (CDP) Data Retention Policy

Contact Key (aka Subscriber Key) is the identifying piece of data used in Marketing Cloud to enable cross-channel interactions.

If you call setProfileId, the SDK gives that value to both CDP and Marketing Cloud. Those modules communicate with the appropriate servers to populate the data used for their features.

setProfileId is the correct method to assign an identifier to both Marketing Cloud and CDP. There is a contact resolution that can happen under the hood without those keys aligned, but it certainly makes things easier if you just set the identifier :)

You can use whatever unique identifier for the contact that you wish.

I have no idea what you're asking in #3, but I would say it definitely depends on your use-case.