Of course, Digg could retaliate and block any story submitted that links to engadget.com (or, more simply, any link that leads to 18.104.22.168 or 22.214.171.124). But, I could never see this happening nor would it be productive.
However, I can envision a couple solutions that would allow the DiggBar to coexist with sites like Engadget.
1. Simple Solution
One issue that people have with the DiggBar is that users cannot see the domain name of where the content is hosted. To solve this problem, Engadget could set up a DNS alias such that digg.engadget.com points to the Digg URL.
This is a technique we allow people to use at Adjix. For example, the following two links point to the same resource located on ps-enable.com's servers:
Note, in the ps-enable.com link, that the URL in the address field of your web browser corresponds the actual domain of the content. Now imagine replacing the ad, at the top of the page, with the DiggBar.
When using this solution, Digg could simply redirect http://digg.com/1234 to http://digg.engadget.com/1234. Although this isn't a perfect solution it does give the reader an idea of which website has published the content.
2. Partnership Solution
In this solution, a Digg URL, such as http://digg.com/1234 would redirect to the partner's website which would display the DiggBar "organically". In other words, the DiggBar would be served up by the site where the content is hosted.
This partnership solution is win-win since the content provider gets the traffic from Digg and the DiggBar is displayed at the top of the page making it easier for people to digg stories.