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Can they see passwords? If so, I recommend not using the same stuff for every instance.
Very unlikely. As Lemmy is open source you can see how it talks and what functions it does. If they were storing passwords in clear text someone would have raised an alarm siren about it.
Best case is they are using a salt and hash method to store passwords making them incredibly hard to brute force.
Can you verify the software running on an instance is the same as the one in the source code repository? You can't. Can you verify the instance isn't running code to read passwords from your login requests even if the code is the original open source code? You can't.
That's why (and for other reasons) you should never use a password for more than one site/service/instance.
Lemmy admins (admins in the Lemmy application) probably can't read your password. But everyone with admin rights on the server operating system can.
That is why I said unlikely. Yes it can happen. All it takes is one admin to look and go 'Why are we storing passwords in clear text?' and that instance is burnt.