I don't know about a blow up mattress, but my cousins used to sleep on bed rolls. They had to roll them up and put them off to the side every day and roll them out at night. That gave them much more space in a shared room.
Also, I don't know much about co-sleeping, but why does DD need separate mattresses? It seems like you would all fit together on a queen/king mattress. Maybe you could lean it up against the wall, like a Murphy bed, during the day?
Lots of folks have mentione all the toys, but what about all the books? You don't have to own all the books you read. Could you narrow it down to one shelf of books you own and maybe another shelf of library books or something?
Maximizing hanging space in the closet, with a system or at least an extra rod is a great idea. (I think someone else linked to one; they just hang from the top rod and give you double the hanging space for short things like shirts/pants. You could still have plenty of room for dresses, as needed.)
I don't know about getting rid of the shelving on the walls, although it is looking a little over-loaded. It looks cluttered, but I wouldn't want to waste all that vertical storage space, either.
I assume, if you planning to live with the folks for several years, that the relationships are good. You're not all confined to that one room (plus desk and sewing area) ONLY, right? I hope you're able to "live" in the rest of the house, too. It seems like you could spread a few things around the common areas of the house--books in the living room or on the shelves near the desk; a bin of toys in the living area; etc.
Best wishes!