I think it’s like this:

Imagine Reddit, but every user stores a random piece of reddit in an instance on their device. They’re all still normal users, so they can’t block users from Reddit or from specific subs, even though their instance contributes to the whole. Their instance doesn’t represent the entirety of Reddit, or even the entirety of a single sub, it’s just a random chunk of Reddit.

BUT a user can be made a sub mod, which now gives them extra power over other users, but only in that one sub. It doesn’t matter whether any portion of that sub is stored on their instance, all that matters is that they’re a sub mod.

So you, as a pleb, have no control over what’s stored on your instance, but a mod has full control over their community (which may or may not partially exist on your instance).

That’s my interpretation, at least.