This is something that WordPress can handle quite well in multisite mode. I found that it helps to use plugins to handle the creation of new blogs. For example, in the last multisite I was involved with, they used CBOX (commons in a box) to run BuddyPress, one of the features was that when a user made a new group, they could add a blog to it. This tied the groups/social side of things together with the blogging side.
For speculation of which plugins to use, I think that probably falls outside of the scope of this site due to being pretty much a matter of opinion. Your best bet is to look into all the available plugins. There are endless reviews you can find via Google.
To answer your points in order:
- WordPress multisite can handle this for you.
- You will need a plugin. You may end up paying money for it.
- That's pretty much baked into WordPress, plugins can refine this if need be.