As of writing, Prosody supports LibIDN (which only supports IDNA 2003) and LibICU for handling IDNA domain support. Is there any chance for experimental LibIDN2 support (and thus for IDNA 2008)?
Be aware that LibIDN2 doesn't support a way from ACE to Unicode, just from Unicode to ACE - however the idna_to_unicode() functionality doesn't seem to be used in the core of Prosody anyway (this is why I would declare this experimental). The core of Prosody only uses idna_to_ascii() as far as I can see.
IDNA 2003 vs. IDNA 2008 make differences once it comes to e.g. straße.de: IDNA 2003 makes it strasse.de, IDNA 2008 makes it xn--strae-oqa.de.