One way to think of it is to think of each instance as a person, and everyone that they federate with is someone they follow, and anyone that they’re defederated with is someone they’ve blocked.

So if one instance follows (federates) with another, that instances users will see posts and users from that other instance.

If an instance blocks (defederates) with another, it prevents the instance from sending or receiving any new posts or comments with the blocked instance, cutting all communication.

Instances that aren’t explicitly federated or defederated yet (unknown) are sort of in a limbo, they won’t be seen at all by any users unless someone from either instance actively searches for it via a link, then those server will follow (federate) with each other.