Yes, but it should be noted identity servers are only used for associating phone numbers and email addresses to Matrix IDs. Matrix IDs themselves are federated just like email addresses (@cyphar:cyphar.com is mine, and it's hosted on my own homeserver at cyphar.com).

If you don't register your phone number or email address (which last I checked is not part of the default account creation flow) then it really makes no difference. I agree they should be federated (and they have been working on that among many other things) but it's not like every user's identity is centralised.

I have run my own identity servers for private deployments without issue.

This is, granted, not as easy as it should be, but it is an issue the matrix team is working on improving.

You also don't need to use the identity service at all. It is totally optional for user discovery.

Third party implementations of the identity server already exist too.

Someone could even write their own replacement that uses SGX if they really wanted ;)