Nah this is not how moderation works on the fediverse. If you defederate from Nazi instances, Nazis have an incentive to go to those instances instead of yours - namely because they can’t interact with Nazi content. They can still harass your users of course, but they can’t build a platform and get banned quickly. So on the Fediverse you end up with a lot of Nazis on only a few servers, and everyone just bans those servers. Same goes for pedos, TERFs, etc.
This makes it a LOT easier as an instance admin to moderate content and keep users safe. As a Masto admin, I only get about 10 reports a week because I block about 200-300 servers. It also incentivizes me and my other fellow admins to block that kind of content, because if we don’t, Nazis will come to our servers and we risk being defederated from.