What would happen to the communities on that instance, though? If they choose to block/defederate then the other instances would no longer be able to access them (or "have all the data"), right?

Let’s say one instance would get massive, and would stop federating and start charging for API access. If that happened, we would be in the same situation as now with Reddit. Yea, it would e a lot easier to set up your own instance, but you would still need to convince all these people to give up that main instance.

I argue it wouldn't be the same, but much better for the users.

You can already make an account on another instance. Ditch the old, use the new. Problem solved. The big advantage is, you don't need to look for a new platform, accustom yourself with the new environment, and so on. Switching between instances is much easier than switching between platforms.

Yes, you might lose access to some communities, but that would happen anyways if you switch platform. And community redundancies exist (the good side of 'fragmentation').

Hopefully, we will get GitHub feature request #1985 fulfilled: Moving user profile to a new instance, which would further ease transitioning between instances. (Don't get too excited, doesn't seem it's being worked on. Consider contributing if you can.)

This would make it harder to excert power in awful instances, people can easily vote with their feet.

I like that idea.