Activity has steadily declined because the Mod is for a game that was aging when the mod itself was released in the first place. Not because of any other reason. People moved on.
As for removing systems/factions etc: It's ridiculous to believe that that is going to fix a mod that is already broken in the way that it's community operates. Player choice is what made Discovery so appealing to many, and the fact that it had something for every branch of players was a major selling point. Reducing the numbers of systems to increase 'interaction' is heavily favouring a few types of players instead of giving everyone the opportunity to do what they want - which would be fine would it not be coated in the guise of 'we're trying to improve the mod for everyone, not just for us'.
Oh, and on the topic of it being a logical consequence: The decision to remove LWB was made way before the Unioner/Bundschuh conflict became a thing in this extent, and using it as a justification itself is rídiculous because developer standards had so far refused to accomodate player RP in story decisions. If they do it just for this one faction, it's quite evident that the RP justification is nothing more than an afterthought to satisfy the vocal Rheinland playerbase.