Update Elements - will update inserted elements by Instance configuration, by the configuration which was used on selected Host. It will not look into the Configuration saved on computer in Configuration Files Location.
Update Parameters - will update only special parameters that have # and ## symbols in front. See more about special parameters in relevant Help page. It will not update location of inserted elements.
Update by DC - every time Smart Connections is used, the tool will add the shared parameter "DC" to the Host element and write name of configuration that was used:
So if you use Update by DC, the tool will read the name of the configuration from DC parameter and will find this configuration in Configuration Files Location and reinsert elements by its settings.