That’s how federation works with[out] requiring a direct connection from every instance to every other instance. My instance can connect to yours to get your content, but also the content from all other instances that you federate with. And vice-versa.

So what? That's like saying ISPs should require Section 230 to avoid liability because they route packets. We're talking about legality: it's stuff like intent and responsibility that matters, not the technical details. Each instance owner still gets to decide which other instances they want to federate with; some 'middle hop' in that connection is irrelevant.

The fundamental issue that Section 230 is designed to address is the separation between the users posting the content and the platform owners who control who sees it, and the moral hazard that creates. If you eliminate the separation, there's nowhere left for the moral hazard to exist.