I don't know too much about self hosting, so it might be worth asking on a self-hosting community to see the specific issues. But from my ignorance I think there are some hindrances with smaller servers and the speed of their comments propagating through the fediverse.

Beyond that I think there is something that would jump out as a bit strange to folks if every comment or post was from @username@theirLiteralHomeIP, and If they are running on a phone their IP would be really volatile which might run into issues as well.

So I don't think there is anything fundamentally wrong individualized instances, but there are like practical issues with it. Further, it is certainly not foolproof, but different cultures of different servers has worked well in the fediverse to allow blocking posts from spaces that you don't wish to experience. If each user had a separate instance it would be much harder to do in practice.

Again, I'm a dumb dumb, so I would hope that someone with more knowledge can clarify, I'm just speculating on what I could see being issues 😅