Imagine instances as treehouses - then servers would be the trees they’re built on.
You enter a treehouse and sit down - that’s your home instance. You can talk to others in your treehouse, you can share stuff, but not between treehouses. You can leave and enter another treehouse (make another account), but what if there was a better way to talk?
That’s where federation comes in. Two treehouses can choose to set up a telephone line with two cans and a string (federate). Then the users in one can use it to talk to another without actually being present (having an account) in that treehouse.