They should have just kept the character, and the character arc, and brought the arc to its natural conclusion. They were on the right track, why frak it all up?
Character: Dukat is a study in hypocrisy and self-justification. He is an utterly selfish egotist, and his eternal goal is to increase his own glory and power. He conflates this with the glory and power of Cardassia, which is of course transparent bullshit that is obvious to everyone but himself.
Character arc: Dukat continually overestimates his ability to scheme his way into power, and use powerful allies as stepping stones to power. He tried to manipulate Starfleet but it didn't work out. He bungled badly with the Dominion and found himself out on his ass.
But his egotism propels him to try ever more risky, improbable and overreaching schemes, so his next attempt at manipulating a dangerous and powerful ally should be the paghwraiths. Not as a follower, but as his same old insanely overconfident self. And since his behavior was always going to lead to destruction, that's exactly where it all goes.
What's wrong with being an egomaniac? That may be an undesirable trait, but it's not evil.
Egomaniacs by definition are out of touch with reality. A healthy ego can be strong, but in touch with reality. (The "mania" part is what implies mental illness.) If Dukat had a healthy ego, he'd have been far more wary of an alliance with the Dominion, much less the paghwraiths, and would not have been on the path to destruction.
Damar's redemptive arc works perfectly, so I don't see any reason to replace him with Dukat or give Dukat a parallel storyline.
We definitely shouldn't disturb Damar's part of the story, since it worked so well. But they could be allies, with Damar keeping the Dominion busy while Dukat runs off to try to manipulate the paghwraiths into helping him do an end-run around both Starfleet and the Dominion. What a coup that would have been!