The effective one is still on hostname validation. Even we do with giftwrapping, Raw event (encrypted message content) will still be seen anyway.
Discussion
*sigh*
the message should not just have a challenge but a challenge pubkey, and then the response can be encrypted, and it can be done over a proxy
TLS has been broken several times before, it's not immune to various kinds of MITM and side channel attacks, and enabling proxy relays opens up a heap of options for relay services
What do you want to encrypt?
The challenge message?
It won't work anyway.
If you try to encrypt the entire event JSON, You are making things harder than nostr promised.
What NIP-42 actually does is basically this:
Relay: Who are you?
Client: I am
Relay: Hello
And then the relay know who the client was, and allows some certain events to be retrieved.