Differentiation is basically an upgrade process - you write a report, give a short presentation and maybe sit a mini viva about your research. In other unis it's just called an upgrade and you submit the written report. It decides whether the research is feasible for continuation to 2nd year and checks progress.
We've not specifically been told about the bibliography but we have been told that we need to know the key people and papers in the field and also know about other important papers that inform our work. The length is variable because it very much depends on what you're field is. There isn't that much out there on what I'm doing and so I've got about 4 key people who have done consistent work on thr topic and a few other papers that touch on what I'm doing. My friend is in a very well established field and has about 150 key papers to choose from.
I don't think length or numbers of papers is particularly relevant - try to go for quality papers by established people and papers which really inform your work then you can check with your sup to make sure you've captured all the ones they would expect to see in a good project and hopefully you'll find a few that they don't know about.
Also ask other studs who have been through the process what to expect. Ours have said that generally they just want to see how much progress you've made and how well you can present your work. Mostly it's to see that you've not spent the first year doing nothing...
Good luck!