To answer some of your questions:
Yes, you could use chain if you wanted to. You'll need a forge and realistically, either a hydraulic press or power hammer. There is no simpler way of making damascus. It is true that it is generally just taking different steels, heating it to forgewelding temp, and hammering/pressing them into one piece, then drawing it out, then either folding or cutting and stacking, and then repeating. That is "simple", just like surgery on someone's finger is-cut, pull skin back, repair tendon, stitch skin back together.... It's all in the details and not easily accomplished.
Your next question as to what kind of steel to use-I wouldn't use chain. If you want a very good cutting blade that will need minimal sharpening, use a known steel. You COULD get good results from the chain, but you'd need to know what kind of steel it is in order to really nail the heat treat-remember, edge geometry coupled with heat treat makes it cut well AND for a long time. Not saying chain couldn't do that, but you take some of the variables out by using known steels. Many of even the best makers use 1080 and 15N20 for their damascus knives. I would start there.
Your question on hardening the blade-yes, you can edge quench the blade, leaving the spine out. Know what it is you want out of the knife which can dictate your heat treatment process. Your reference to putting clay on the blade is most often in regards to achieving a "hamon". Do some searches and you will see what goes into it and the work required to get a good hamon. Fast quenching steels like W2, 10XX are typically used when looking for a hamon, not damascus steel; you want a carbon steel with lower Manganese.
Jeremy