The problem here colons are being (ab)used to generate arbitrary indentation
and then we generate loads of slugs ('insert paragraph' buttons) to allow the user to insert content at any of those list levels
Sorry, I didn't bother to look at the wiki syntax. It's definitely not how it's supposed to be.
If VE shows something different from how the page is rendered, then it's a bug, but feel free to make it lowest or close it as invalid.
Not necessarily. Sometimes we need extra room to show controls, such as with these slugs for inserting new paragraphs. If the rendered page shows two tables stacked on top of each other, where does the user click to insert a paragraph between them when?