If the admin blocks an instance it's either a community you as a user won't want to be interacting with, or the user has chosen the wrong instance for them to be on.
I don't know why people say that every instance not federating with every other is a bad thing. It's not. I definitely don't want to interact with the extreme right instances around so I choose one that I feel at home with and that has them all blocked. I think that's the beauty of the system.
I have not seen any evidence of any major instance ban another instance because it refuses to ban yet another instance. There would be no reason for that. Messages from the controversial instance still won't make it to the instance that demands the 'virtual signaling' even through my instance.. unless some user on my instance essentailly quotes whole posts.
If you're hosting people who already have a large audience, or are especially vulnerable to harassment, that's probably going to happen sooner or later and it would be wise to craft or copy a denylist before it does.
I run my own Mastodon server and I've never had to take any moderation actions with a few hundred followers. I know the names of a few vile servers and can't recall seeing them among my followers. I suspect I'm fortunate in just not being interesting enough to vile people.