I might be talking bullshit here as I’m also pretty new to this. But I believe an instance is the server (basically like Reddit) where all the communities (Subreddits) are located. These instances can federate with other instances to grow in a decentralized fashion. Every instance can impose site-wide rules (e.g. beehaw disabled the downvote button, I believe, so you can’t downvote anyone in all of the communities that belong to the beehaw instance).