Who issues the badges?

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Anyone.

So how does this process work now? People open up some PRs for the nostr repo based on the spec and the one that fits the most gets merged?

Essentially, yes. It's then up to relays or clients to implement them. They aren't required.

What do relays do, and what should I do with them?

They allow users to publish their notes and events to their database and allow users to read those events that have been published.

So, how does a relay prevent malicious content from being posted and stored? What happens with photos, video, etc?