Deterring them from the Fediverse (as in not letting the use the protocol) is a near zero impact for them outcome, possibly technically impossible (it's an open protocol and the software is open source) and possibly with a lot of negative impact for everybody else (it risks undermining the main point of the Fediverse - Freedom).

Much more important is deterring them from spreading their hate to other people (in general) and as it so happens, when it comes to the people in the Fediverse, them segregating themselves in their own server actually helps with that: other servers can simple defederate, taking away their audience, hence they're not actually spreading their hate to others in the Fediverse.

With them not being self-segregated it's a lot harder because it they'll do what they are doing right now: join servers all over the place, post comments all over the place, so in response they get banned if they go too far (and then just open a new account) and others tend to try and nullify their poison by downvoting them or pointing out the with logic the stupidity and/or inconsistence of their position, all of which is a lot more fallible than just defederating the NAZI instance.

More generally, there is no perfect way to "deter them from the fediverse" (just try to actually analyse the problem space and you will soon find that there's no foolproof method), and hence the discussion has to be about how far should we go and what the delivers the best results, which brings us around to the point I was making: having the NAZIs in their own instance does more to stop them spreading their poison the Fediverse audience than somehow blocking that and keeping on trying to stamp them down individually when they're mixed with the general fediverse population.