Look, you're absolutely right about pretty much everything you said here. My issue is not exactly with the concept of federation per se, but with the potentially cavalier selection from a top-down level.

The Beehaw situation is really what I mean. At least for the next few months, it seems to me that there will likely be a lot of confusion and frustration over how this all works from new users, and even longtime users will be left wondering whether they need to just keep making new accounts in order to interact with the communities they have history in. C/technology on Beehaw is the de-facto tech community, and it's now inaccessible to a huge number of users, and for somewhat specious reasons.

I understand the utility of federation and de-federation, but I don't think it's being handled well right now.

If a bunch of nazis want to run a server and post racist shit all day we can’t stop them. But we can (and should) defederate from them. They can have their own private island.

And what if they post racist shit all day on their own instance but also post normal and helpful stuff on communities of other instances? Just don't visit their communities, that's it. No need to block potentially helpful posts of members of that instance everywhere.
The same thing when there's a NSFW and your own instance doesn't want to see NSFW stuff. That's fine but it's not like the users of that NSFW instance are running around posting porn on every other community.

If some of them do, block the users. But there's no reason defederating the whole instance because those users can and do also participate just fine in other topics that have nothing to do with NSFW or nazi stuff.

For example why should a programmer that has a nazi instance as his home not be allowed to post memes in a community about programming humour from a regular instance, when he doesn't post anything there that is in any way related to him being a nazi?