I think 3 is fine. The more you add the less impact an the less distinct they will be. And the more random an clustered combat will become. I mean sure it might be funny to have a 6 or 8 way faction battle a few times but it would quickly become apparent I think that it was too chaotic to work.
An yes the 3 factions should feel as unique as possible with unique weapons an tactics. Though Neutral equipment should be close in power to faction exclusive stuff so balance isn't as big a deal.
Also yeah the ability to swap faction is probably a poor idea an shouldn't be in the next game. I think there should be incentives to keep population balanced though. Like bonus experience towards ranking up if you play on the lesser populated side or something.
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