Circling back: "Are blocks processed at the host or index level?" I think the post below suggests that posts by blocked accounts are probably filtered out by the index server, not the server where your account is hosted. That seems to me the best explanation for why they're visible on the protocol: so that indexers can use that info to arrange the user's timeline. Otherwise, the blocks could be handled by the host, with no need to make them public. But I may be missing some nuance here.
Another thing that just occurred to me: #Bluesky started off as a project exploring the possibility of transporting #Twitter onto a protocol that allows for account portability. I've been thinking of that mostly in terms of data capture — the network is designed to make users trackable no matter which server they call home. But if the plan is still to transplant Twitter onto the AT protocol, then eventually the entire population of Twitter will merge into the Bluesky network.