Advantages to Flashing:
Lets you play backups
You can still use live
Disadvantages of Flashing:
Not all computers support flashing.
Should M$ find out about the flash, they will ban you from live or maybe even brick your box (they do this often enough anyways). This has not happened yet though. Stealth firmware with stealth backups may be undetectable.
Advantages of a DVD Modchip:
On/off switches (some models)
Original drive firmware is untouched
No need to use an sata connection (some models)
Disables live (some models)
Disadvantages of a Modchip:
Soldering is more difficult than flashing (hard install).
Backups must use a different security sector (NME in perticular). Thus these backups are incompatible with firmware flashed drives and other chips.
Nobody has been banned yet, so there is no need.
Modchip developers aren't working on developing any REAL chips.
No stealth on most chips. The ones where it is supported would have it via flash anyways.
Advantages to doing nothing:
Warrenty not voided.
Never going to get banned
You don't have to try and take apart that goddamn case.
Disdvantages to doing nothing:
No backups for you!
Conclusion: At this time, modchips are a waste of money. They are more difficult to install and more difficult to use and cost you money on top of that! Should they create a true modchip supporting imported non region-free games and homebrew, I would throw my support wholeheartedly, but right now they are just making a quick buck off unfounded fears.
I advise flashing and leaving the network cable disconnected when you aren't using live and never updating until you reaserch the update on the net and confirm its safe. Even if you don't flash I advise doing that as M$ bricks more boxes including unmodded ones every update.