This ignores the social aspect. If instances are allowed to wall themselves off from other instances or fracture how the federation works, that means leaving the big instance for the smaller one isn't much different than leaving reddit for lemmy.

We basically see this in microcosm on Reddit itself. Such as when a subreddit for a topic exists and is modded by shitty mods. If that subreddit is the "main" one for that topic, the moderation can be terrible but the users will stay rather than start an alt sub. The alt sub simply will not grow because, to spite the terrible moderation, people simply won't be bothered to spend time on a smaller sub and build it up while the big one exists. The moderation has to be extremely, untenably bad to kick off the mass adoption of an alternative, otherwise the alts just kind of exist with a fraction of the interaction and growth of the "main" sub.

The problem is user lock-in, and that's not easily solved with code. It's a social problem.