Thanks for the question.
"No arbitrary nesting" applies to inline formatting. Higher precedence formatting can be nested within lower. So, nothing can be nested within a code span, for example, as it is the highest.
Just a way to order things.
Container blocks are nested arbitrarily, up to 16 levels. Quote > list > quote > code, for example, is OK.
What are the restrictions? For example, I care about these (off the top of my head):
1. Can I nest a block quote in another block quote? 2. Can I nest a block quote in an (ordered or unordered) list? (And vice versa?) 3. Can I emphasize some text inside a strong? (and vice versa?)