For the record, my tutorial uses approach 2. My Portugal Mod for a long time was not a modbuddy project.
V16.4Beta of my Portugal Mod, last "file by hand only" version before I migrated to modbuddy successfully. I still have to add a section for Modbuddy approach 1 (what I call ModBuddy migration). But, meanwhile, I will be answering your questions.
The art in Modbuddy has additional steps to add the dds files you already built. The main step in my opinion is the generation of texture files (.tex) in Asset Manager. An important note is that when you change your DDS files you have to regenerate Texture again, by each DDS you modified. That´s why a "modbuddy template" does not work plain and simple, you often want to change DDS for your own, and nothing is there to see in-game if you don't regenerate textures. And, yes you have to add all sizes and generate all the textures, modbuddy is not that user friendly.
XLP files are used to build your package images, Modbuddy generates BLP files out of this XLP files config. Here (in XLP) you define what are all your textures (.dds/.tex), to the game to know what are your images. Most of them are UITexture type (ClassName), only fallback images have diffrent ClassName: LeaderFallback, and therefore go to another xlp file. You simply can have two xlp files, one for all UiTextures, including leaders screens, and another XLP file for fallbacks (see my Portugal mod for reference). XLP config does not mean you don't have to match your icons with your stuff, that is done in <IconTextureAtlases> and <IconDefinitions> (
my Icons Tutorial section), you have to do both configs, but XLP is only in modbuddy, where BLP are generated for final publication of the mod.
Artdefs, also part of
my tutorial look&feel section, define graphics of stuff in-game. If you want a building, unit, and such, you add correspondent artdef. LeaderScreens also require artdefs. For the game to know what is your in-game art goes to .Dep file, where there must be references for your artdefs files. XLP references also need to be added to mod.art.xml but pointed out as BLP extension (final published file). Modbuddy autogenerates .DEP file, but you have to add your references of artdefs and blp´s in right places of your mod.art.xml, and in project Properties mod art dependency file(.dep). Modbuddy needs you to add this 'mod art dependency file' instead of the mod.art.xml, to generate the .Dep file. Nevertheless, there´s a tool for mod.art.xml autogeneration, pointed by me, but did not work for you, in the meanwhile I noticed that there´s an update to that tool, go
here, and try again.
About that autogenerated folders when you use .BLP method (approach 1) they are in fact redundant because BLP is a package with all your art in it. Understanding this, In my Portugal Mod, I removed the textures folder from modbuddy project, they are there yet but not added to the project, therefore they don't appear in published mod. Summing up, don't need textures (animations, etc) because all is in BLP (if all configured with approach 1). And art references are in .DEP file.
Hope this helps.