I would make it so that every duchy would be own realm, and coalition of realms would be federation. Realm could have only 1 city!
Atleast i would test it out 
That is what is in the works in the Colonies right now... One last hold out realm with three cities and it will be done. A guild will be created for a senate to discuss Colony laws such as infiltrators buying back bans to keep them from being booted off the island. But each city will be its own realm...but of course can unite into federations (which would give a unity to senate votes and such). We will see how it goes.
