I think you have more or less the right idea in your original post. Except don't consider YO a demo. It'll continue to be a game right along side LiF:MMO.
I think in the FAQ, it's still undecided if LiF:MMO will be Buy to Play or Free to Play on launch.
The deal with LiF: MMO is that you'll start on a newbie island with a skill cap of 150. You can stay on this island as long as you want. It'll have a prebuilt city on it (within the game mechanics building) and no PVP. Basically an area to get a feel for the game.
Once you want off Newbie Island, it'll cost something like $20-30. Then in the future, probably a lower price if you want additional characters.
Basically, rather than attempt to launch a massive server farm from the get go in early access, it'll be easier to test features of the game(s) via these smaller servers, both officially run and unofficially player run.
That's my take on it at least. This may help as well:
http://lifeisfeudal.com/LiFYO
Sometimes reading forums or global chat is like reading a book called "Baby's First Game Test". Does no one understand the concept of early access alpha testing? I swear, 'some people's children...'