The first reason your cat may challenge an unfamiliar cat is to protect it’s food and living area from intruders. A domesticated cat normally has plenty of food and a secure place to live, so there is no need to be territorial, but they often revert to their wild, instinctive nature.
The second reason why cats are territorial is because in the wild they will be vying for the attention of a female in heat. This situation is eliminated, in most cases, as the domesticated household cat has been neutered and a desire to be territorial for this reason is no longer present.
In addition, domesticated cats generally live in areas where there are other cats in close proximity, and once they become acquainted with other cats in the neighborhood, there is no need to establish dominance over them.
This has often led to a somewhat more social behavior with domesticated cats where they can sometimes welcome neighbor’s cats or at the very least put up with the fact that other cats will sometimes wander through their territory.
The fact that they are comfortable with the property, and realize that the security, food and shelter requirements are being met without them continuously having to protect it means they no longer feel the need to be territorial.
Fortunately, this makes life a lot easier for cat owners living close to one another, as it reduces the incidence of cat fights, and also, the unwanted habit of cats spraying and leaving their scent on your neighbor’s stuff.
It certainly makes for a happier and more peaceful environment than if our cats still possessed the behavior to the extent that is natural to them in the wild.