If the descentralization of social networks continue, we will have to prepare for the eventual rise of the instances wars, where people will start to fight about which instance is better and which one is weird to be in and so on, but that’s for the future of us all.
@fluke in case this is not a joke, yes instances host communities, but the lemmy.world is just a domain name. Federation just means lemmy.world and another server/instance such as geddit.social can share and exchange communities, comments, and threads they host with each other. I’d be happy to answer additional questions you might have, but I’m not as expert as I don’t share links in that format much.