When I had my dynaring. I had atf in bike and changed oil and went with their recommended .....synthetic oil cant remember now.
Had same problems either it worked with slipping or didn't work at all really. Easy to install and pain in the rear to dial in that's for sure.
Still couldn't get anything to what I liked or how it should work. I took it all apart and soaked the dynaring and plates in the same recommended oil and after getting it assembled worked somewhat but was working like you had to throttle a little to keep bike running it was kinda draggin the bike down.
Once you get the bike operating like that then you gotta adjust the clutch how they say. From what I found out was very little I mean VERY little goes into the adjustment. Very easy to miss the spot where its suppose to be. I spent 4 hours to figure that out btw. I simply just kept going past where I wanted. In a fit of rage I was talking to the dam thing and said adjust this and just adjusted it to be an ass very little said there adjusted and said Im done..........it worked

But it was that little bit and not farther that was the deal. Didn't touch it after that and bike operated like it should. If you bumped it it would go all whack again.
Its a nice little upgrade but I really didn't like it. Gave the kdx a minibike feel. I took the fact that there isn't any made any more and thought about future wear and tear and opted to sell it here and put the money towards an air filter and chain and other things for the bike. Felt it made me lazy and for what I ride and where, it was a bit of overkill. Mine was dam near new from what I could tell. Plates didn't look overheated like yours or what you described.
If your trying with atf I would go with their recommended it worked great with the dynaring and atf didn't work so good. Once you get the new oil I would soak the dynaring and plates in the new oil too. I let mine sit for about a day and the next day mid afternoon put it in bike.
If your going off of their instructions they tell you to adjust it small amounts at a time iirc. You get it to where they say and its a small turn to get where you want. Its not far from where they tell you to start. AT ALL. and even just a smaller amount past your not going to get it to work right. There is a sweet spot for sure.
I installed the dynaring with stock balls springs everything out of package.
So my guess for you is either oil , you have the stack wrong or plates not facing right, did you remember to remove the two rings from your old setup?, is your clutch cable new?(helps).
Kinda sounds like your going in too deep in project. Get back to where it was stock. Use their recommended oil. Make sure you have the stack right....iirc you need those to steel plates by the dynaring and facing a certain way. Make sure you soak it in the right oil too. Follow the install guide and also the setup for clutch. That pretty much gets you to where its gonna either stall out or slip and adjust cable very slightly to where your either not slipping or stalling out. They say in the instructions to go like an 1/8 of a turn and I call bs on that one. Mine worked where I adjusted cable and lever to what they said and I think it was maybe 1/32 of a turn and no more. You also have to work the clutch a couple times in between each settings and that also changes it a lot too for how much you turn.
Sounds like you installed it fine and nothing wrong with dynaring to begin with but you just didn't get it adjusted right. Which in my opinion was what makes the swap hard. That and mine didn't like atf at all. Worked better with regular oil and worked best imo with the recommended oil.
Just seems to me that your tearing a car apart for a spark plug problem so to say.
Also how do you have your last friction in the basket?