But then what is a relay? See if a relay doesn’t hold an account and cannot ban/moderate directly content they serve then what’s exactly happening?

A relay is like an instance in AP. It hosts content and relays content from other relays according to its own moderation policies. The difference in nostr is that most users are usually connected to multiple relays, whereas an AP a user is connected to one ‘instance’ and their instance connects to other instances.

I also wonder if it’s a bit of a legal minefield. See I’m running mbin here. I get content from many other mbin/kbin/lemmy instances. Usually they have pretty good moderation and content is removed on my instance too. But, if someone raises a legal complaint with me directly, I’m required to act on that and moderate on my own instance. Which I can do. It seems like you’re suggesting that’s not directly possible with nostr?

This works identically in nostr. You as a relay admin can block/delete content on your relay and set whatever moderation policies you like. You can also de-federate from other relays if they have poor moderation.