Thats a good question.

Users are still able to see their videos, it just does not create a local copy unless you enable that on your server. Its just a pass-though.

EX:

• https://videos.abnormalbeings.space/w/k7oGP4hkGWMx2oJxpw6KUd which is being passed though
• https://video.canadiancivil.com/videos/watch/9ac216ba-1a55-4ca9-9e6e-574f53a92ba8 original server.

You can see that more clearly here:

And here is my subscriptions (looks and functions identical to Youtubes subscriptions):

But the videos are on their respective servers.

Federation still occurs (and admins can be very specific if they want):

Hope that makes sense!