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Why is defederation an option when Limit/Mute exist?
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Defederation is an absolutely necessary tool. There are instances out there you don't want any part of, with CSAM etc. But with that said I think defederation should mostly be used for such things. Block lists (containing instances, users, hashtags) that users can subscribe to would be a better way to handle the rest, and instances could recommend and/or curate lists for their users and maybe activate them by default.
Instances defederating from another instance because that second instance hasn't defederated from a third instance is a good way to ruin the future of the Fediverse I think. It's just an immature and destructive behavior leading to fragmentation.