How do Schengen borders work?

1. Now do I need to apply for a new visa from Greece embassy for the same dates?

Not really, your visa is valid and it is not possible to issue two overlapping Schengen visa. What you could do is email the Greek embassy/consulate and asking them for advice. They probably don't care and will tell you that it's OK or dodge the question but it gives you some paper trail proving you were upfront about it. There is a worse case scenario though, they could also tell you to ask Germany to revoke the visa (which means you have to undergo the whole application process again) or tell you not to travel at all.

2. Can I use my current visa, enter and leave schengen from Germany but spend most of my time in Greece? e.g October 1 entry to Germany, October 2 fly to Greece, October 30 fly back to germany, October 31 leave Schengen.

It is not illegal to do so. What is illegal is telling Germany you intend to spend a month there when in fact you want to go to Greece. And from a border guard's or police officer's point of view, your trip looks very much like what someone would do if they obtain the visa fradulently.

3. How do they track my physical location inside Schengen? Just wondering what's stopping people from doing #2

Your physical location is not tracked systematically. In practice, you can often do what you propose without trouble. It's not really a big deal, going to such length (making sure you enter and leave through Germany) just to circumvent the system is expensive and troublesome.

There are also many other ways you could get caught, say you are doing something illegal in Greece and the police picks you up. It's also difficult to lie consitently and convincingly so if you are asked to detail your plans (which is not always the case), you have to choose between revealing the change of plans yourself or getting trapped in a lie. Once you tell the border guard that you are staying in Germany, there is no going back, they have direct evidence that you committed fraud. They might not notice but if they do anything you have on you (tickets, booking in Greece) would be additional evidence against you and you cannot claim you acted in good faith anymore.

Some countries do go beyond that, going as far as rescinding a visa if they notice you cancelled a hotel booking (that is even if you still intend to travel to the same country and the same city at the same time but have a different accomodation!)

You have to remember there are rules. Whether you like it or not, and whether this is fair or not is irrelevant, visas are not a right, they are a privilege. Each country (or here, union of countries, the Schengen Area) is free to decide who can enter, and under what conditions.

The rules are clear. You cannot ask for a visa to travel to country X when you intend to travel to country Y instead. Especially for a long duration stay like the one you are discussing.

Also remember that even if the probability of you getting caught is probably small, the consequences if you are caught can be devastating. Being turned back at the border, spending hours or days is “administrative hold” while they decide how to send you back, and a big black mark on your record are probably not something you want to consider. And even if there are probably thousands of people every day who get through the net with “creative” interpretation of the rules, immigration officers are well trained and quite good at spotting people who try to do so. And once they have their eyes set on you, it’s usually very quick to find out the truth. You’ll lie, get caught in your lies, they will find evidence (travel plans, bookings…), and it will end badly.

Circumstances have a big effect on the whole situation. It’s a lot less likely they’ll be suspicious if you’re an affluent citizen of a relatively rich country which is just on the edge of the visa list, who has travelled many times to the Schengen Area, and spends a lot of money there, than if you’re on the edge of the poverty line (or below) with no travel history, for instance. But in the first case, you would most likely already have a multiple entry visa allowing you to travel as you wish…