We didn't really see JKs POV so not sure if he was nervous or not. But I would expect he's been looking forward to this night with Dan. Like he said, he's been holding himself back and can finally have his way with Dan. I don't think this will be when he confesses, I think it is a slight set back to his development. Maybe his growth will come if he loses a match after fucking Dan and accepts it, or he goes the night not having sex and wins a match. I don't think them having sex rn is a bad thing for the plot, just gives JK more time to yearn and grow.
It's not the fact that they're having sex now (I agree that a slight set back can happen even when things are generally moving forward, it would actually make it even more realistic) but it's the specific way it was portrayed that made me think of a dream, also the fact that we didn't get Jk's thoughts as you mentioned makes me think it was Dan's imagination (and still craving for). They are both holding back and it's plausible that they will really do it some time soon, only this time it felt like it was from Dan's imagination. But it's just a thought, I could be wrong
Well dreams can be about memories but also fears or things one craves for...I think it could be the latter this time, because Dan is definitely aware that Jk's changed and the fact that he also apologized when they were on the ferris wheel might have got Dan's hopes up again. Maybe he's trying to imagine how sex could be from now on, if he's not asleep he could be daydreaming or something like that. Another option is that it's not Dan but Jaekhyung who's dreaming all this steamy but caring sex.

It all went way too smoothly for it to be true, at this point in the story Jaekhyung is not as confident as he used to be when he didn't really care about Dan so it makes no sense for him to jump Dan's bones like that, no nervousness, no hesitation whatsoever...I think this was Dan's dream, maybe after dinner he went back to his room for a quick nap before meeting with J. Well we'll see soon enough ;-)