Yes, many questions in this eps.
The Agrathi penal system may not be about corrections or rehabilitation or deterrence, only punishment. And then Agrathi may not want to inflict "real" punishment because of reasons, so they create "virtual" punishments.
And a criminal without remorse or conscience wouldn't suffer as O'Brien did, so perhaps each punishment is uniquely created for each criminal.
This Agrathi mind technology may extend well beyond their criminal justice system. It may be used extensively in all aspects of their society, as reward and punishment and more.