I checked only a little bit,
The error seems to be raised here in matrix-rust-sdk in element

                VerificationLevel::UnsignedDevice => {
                    // This is a high warning. The sender hasn't verified his own device.
                    ShieldState::Red { message: UNSIGNED_DEVICE }
                }

Which is only called if this returns false

    /// Is this device cross signed by its owner?
    pub fn is_cross_signed_by_owner(&self) -> bool {
        self.device_owner_identity.as_ref().is_some_and(|device_identity| match device_identity {
            // If it's one of our own devices, just check that
            // we signed the device.
            ReadOnlyUserIdentities::Own(identity) => identity.is_device_signed(&self.inner).is_ok(),
            // If it's a device from someone else, check
            // if the other user has signed this device.
            ReadOnlyUserIdentities::Other(device_identity) => {
                device_identity.is_device_signed(&self.inner).is_ok()
            }
        })
    }

But I do not know if nio supports such device signing

In reply to @maru:mike.it-loops.com
I am testing the verification steps. what I wonder is how do I get an OlmDevice?

In reply to @maru:mike.it-loops.com
hmm after login this is empty

import nio

ac = nio.AsyncClient("server","user",store_path="store")
await ac.login("password")
await ac.sync()
ac.device_store.items()
dict_items([('user1, {}),.....])

In reply to @maru:mike.it-loops.com
if you run sync() and not sync_forever() you have to call keys_query() as well

Oh interesting:

Automatically called by sync_forever() and room_send().

Have you tried using emoji verification rather than manual?

https://github.com/matrix-nio/matrix-nio/blob/main/examples%2Fverify_with_emoji.py