TLS is required in Mastodon for all transport. And of course your IP address is not included in any payloads leaving your server.

>The average joe expects direct messages to really be private. If they're not, that's bad.

They're not "really private" in Twitter DMs and Facebook Messenger and PMs on phpBB and Discourse forums, they were not "really private" in ICQ, AIM and XMPP (unless you installed the OTR plugin on the last one). E2EE is cool but most private messages on the internet do not use it and they are still called things like "private" and "direct".