When you browse your Local feed it only shows communities that live on the same instance you made your account on.
For federation: When you want to see a community on a different instance your instance will download a copy of the community from it’s home instance. Then if you make a change, like an upvote or a comment your community makes the change on its local copy, then it sends a copy of the change to the original community.
When two instances are defederated they stop sending or receiving updates from each others communities.