Realistically, a "flag" is just a downvote. You can upvote or downvote a post. The stigma of it being bad, and only for abuse, has latched on due to the interface. It is however necessary to disincentive abuse... could you imagine someone profiting from stealing your work, or something illegal like sharing child porn, and no one being able to do something about it? Horrible.
Unfortunately like you say, there's no good way to figure out how to do it decentralized, as it has trade-offs.
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Ok ya, so it's not like by being "flagged" it is that horrible in the end, and I can see it being huge if like you say someone is doing something illegal for sure. Thanks for the reply!