If they are still allowing access to all forms of third party content through their own instance (even if they restrict the discoverability) then they are still risking being held responsible for that content. So imho, that would be a mistake.
Personally, if I were to host my own instance under such a protocol, I'd rather NOT allow any potentially illegal content that might come from an instance I don't trust to be distributed/hosted by my node.
The problem, imho, is in the way the content needs to be cached/proxied through the node of the user in order for the user to be able to consume it. This an issue in the design of how federation typically works.
I'd rather favor a more decentralized approach that uses standards to ensure a user identity can carry over across different nodes of content providers, whether those nodes directly federate among themselves or not.
There should be a separation between identity providers and content providers, in such a way that identity providers cannot be held responsible for what the content providers offer, and content providers can take care of moderation without necessarily having to worry about content from other content providers with maybe different moderation standards.
I'm not saying ATProto is that solution yet... but from what I've read it at least tries to come close.
It is but that's largely conceptual so doesn't really mean anything in the context of the protocol. These are message exchange protocols so the defining element is whether the messaging is federated or decentralised.
Fwiw AP also supports DID I just haven't seen any implementations use it, since it strongly recommends other ID (a mistake imo).
> It's also very weird how...
What you're describing here is a cultural phenomenon, not a technological one, so isn't really relevant to the discussion: ActivityPub siloing isn't a feature of the protocol, it's an emergent feature of the ecosystem/communities.
It's also worth mentioning it isn't usually implemented as you describe, unless you're specifically concerned with maximising your own reach from a publishing perspective: most instances allow individual users to follow individual users on another "blocked" instance - its usually just promotion/sharing & discovery that are restricted.