How does this solve for illegal content?
Are files encrypted and sharded or stored un-encrypted and whole by the client (node)?
Files are not going to be encrypted as a decryption key will have to be supplied. This defeats the point of encryption. All data on the chain is public afterall. Blocklists can be established between service nodes and users to prevent illegal content unaccepted by the network. Service nodes can also have their own internal blocklist for storage. Blocklisting can be done by IPFS hash and/or permlink or account name. Users can also opt out of storing content they don't want to.
What's the algorithm on deciding a recall block? Will it learn heavier towards more recent and higher viewed videos or will it include all the shit literally noone watches or upvotes?
Most likely it will be selected completely randomly. There will be additional incentive for videos that are not well backed up. Views/number of plays/upvotes have no relevancy in storage, especially when considering the storage system is most needed for archival of older videos.