Who receives royalties for publishing updates for WA?
Team 17.
Do Deadcode and CyberShadow do this for nonprofit purposes?
Yes.
Is there a legal contract between DC, CS, and Team17?
Not currently AFAIK. I believe they each received a one-time payment of ~$1000 for helping to release the game on Steam.
Is WA 3.8 and 4.0 real? Or is it just a bad joke?
WA 3.8 is very much real and has been almost finished for several years. From
what I can tell 4.0 is mostly vaporware at this time. At least the 4.0 as originally envisioned seems impossibly ambitious and that fact (and their perception of our expectations) probably demotivates them a hell of a lot. The truth is we'd be happy with anything.
Is Team17 aware of these updates? If so, do they interact with it?
Yes of course. Team 17 gave CS and DC the source code, they asked for help releasing WA on Steam, they conduct a review/vetting process on any updates made, and they host those updates on the official Team17 website.
Will Worms Armageddon be released as a new game due to WA 4.0 major overhaul of the game itself?
If WA 4.0 is ever released, I think it would probably be sold as a 25th year anniversary edition or something. I would like to see CS and DC make money off of it though.