Yes, this is how federation works and it’s the main point all those users that are bitching about the move do not understand. LW does not care about piracy, they are afraid of legal consequences, because with the federation protocol you are hosting all content of other instances. It’s not embedded, it’s mirrored, so there is no legal difference between the origin instance and the federated instance.

It happened a couple of times. Sadly it usually results in the newly founded militia becoming the new cartel in the area.