Regarding server ownership, yes that is a thorny problem. One could dream up some kind of communally owned server system but that might be far fetched. However, I think the issue of mod power is distinct and might be easier to address.
As for the flaws of democratic systems, yes, they are real but most of these flaws apply to more autocratic systems as well. And we see from numerous examples that more democratic systems tend to abuse their power less often and severely than autocratic ones do. It’s a higher bar to get the whole community together to ban MLK than just one racist mod. Carefully thought out governance structures can also help. You certainly don’t want 51% of the community to be able to ban 49% whenever they want to, but the ideal would be to enable easy involvement with a structure that guides users towards making the right decisions.
The structure and culture to make this work could be difficult to build, so I’m not saying it’s an easy answer but it does seem like something to consider and maybe experiment with.