The idea is that you join or self host some home server, and the admin of that server makes sure to only show content from decent sources.
To this end the admins have a few tools. They choose the list of servers to show new videos from in the publicly available lists ("new videos" etc). So these will come from servers with a history of good moderation.
As a user, you can also subscribe to content from servers not specifically approved by the admin. If the admin finds it really offensive they can block that also. Then, as a user, you need to either give up on that content or find a different home server.
Obviously an admin is also responsible for the content they themselves host.
Moderation depends on the instance. The sysadmins choose what videos to ban and what other instances to federate with. Most users choose a single homeserver that reflects their values on moderation.
Diode.zone is an example of a popular "heavily moderated" instance. It has some decent videos.
The less-moderated instances tend to federate more so I think a lot of the unpopular stuff gets drowned out with "popular" stuff (which apparently includes a lot of european TV news, linux stuff, liberal/libertarian rants, video games, public domain films, and "my little pony" videos). There is very little NSFW content at all because the default behavior is to blur the thumbnails and many instances just block it anyways.
Edit: actually I just found some sort of vlog channel run by nudists that didn't mark their videos as NSFW. LOL