Unlike search ads, businesses buying fb/insta ads care a lot about attribution (at what rate does someone who saw the ad buy something).

If ads aren’t effective businesses will stop buying them.

Fake clicks will always result in a no-purchase, and therefore would devalue FB’s offering in the #1 metric ad buyers care about.

Not to mention that would be fraudulent behavior and they’d be opening themselves up to huge litigation risk.

I'm not necessarily talking about bots clicking ads, could just be fake profiles for whatever reason: inflating the number of likes of a page, writing reviews, phishing attempts, propaganda etc

Let's say FB has 200 million bots. Do you think businesses could tell that there's actually 1.7b users and not 1.9b?

As someone who had bought ads there, I can tell you this is not as true as you think. You pay for the ad and the business picks up a bit, but the reported conversion numbers at least for me never made sense. It's really about making more money than you put in that you keep it going. Now given the ethics around Facebook, I don't do it anymore. I say it's all about CPC, I admit here it isn't.

Not sure I follow - isn't making more money than you put in a direct result of a high conversion rate?

But I'm curious to learn what you mean! I have no direct ad purchasing experience

Far bigger problem is that DAU and MAU are a vague metric and don’t reflect the amount of time on the site, click through rates, advertiser interest etc.

For a crude yardstick during a growth phase, sure. For measuring the long term health of a mature business, nope.