Can someone explain how this can/would work for a Lemmy user?

Very similarly to how you now can interact with Mastodon instances

could this connect to Lemmy somehow, or would that require an integration between bonfire and Lemmy?

It could, maybe it already somewhat can . It shouldn’t require now nor never an explicit integration as they should be able to speak the same language (ActivityPub) . you can try interacting with my personal instance bonfire.fishinthecalculator.me .

How would instances of bonfire decide whether to connect or federate with Lemmy or vice versa?

I don’t know about Lemmy but bonfire can have block list both at the instance and the user level, so the admin can provide defaults but then each user is able to customize them