You've got to use the first one. I don't know the general rule, but here you can't use "duquel" because there is no particular referent. "Nothing shows a man's character better than what he laughs with" (i'm not sure about that english sentence, but you'll know what i mean) 'What he laughs with' is something general, so you have to say "ce dont". 'Duquel' has to refer to something that has already been mentioned. I hope this is a bit clear?