Then why are instances defederating whole instances

That requires a little less tl;dr. What they were talking about was in regards to populating your feed with content from other lemmy/kbin servers communities. That’s one part of the federation going on behind the scenes. The other part is that lemmy servers are usually set up so they can federate with whomever by-default , just that they can’t know about any other lemmy server out there unless a user on that server specifically finds a community on another server and interacts there in some way. From then on they are federating server to server through those communities. The two are loosely related

The reason for the recent defederations from lemmy.world and sh.itjust.works servers were due to bad actors (read trolls and hate speech) from those servers according to the behaw.org server admin. It could have been taken care of through moderator actions on the affected communities or by banning the bad-actors from behaw.org by the server admins, but the current lack of mod tools and lack of manpower of the mods there would be too much to take care of. The options for deferation on lemmy right now aren’t very fine-grained, so it was either tons of work on the moderation side trying to keep the beehaw communities safe for their users, or the nuclear option of defederation, which is what they ended up going with.

Feel like this is a bit long winded, but I hope I’ve helped clarify it a little at least.