Think of instances a bit like mail centers.

When you are federated with an instance, they will deliver their mail to you. You are also able write to any of their communities, who will deliver that mail to other instances that they're in business with.

But when an instance defederates from yours, they're no longer delivering mail to and from you. When you look at one of their communities, you effectively have a mailbox, still with the carrier's logo, but nothing is coming or going anymore. What you're left with is all of the old mail that was there before they canceled your route, along with new letters being written by people on your side that will never be delivered.

From the perspective of the other instance, however, they've torn out your mailbox entirely. It effectively doesn't exist.

The more complicated part is what happens when users from these two instances visit a third who they are both federated with. That third instance will accept my mail, and share it to everyone else. But the instance that defederated from me will not accept any of my mail, even when it's routed through the other instance.

But defederation is a one-sided block (unless both instances defederates from each other), so the third instance will still send me comments/posts from people on the instance that defederated from mine. But if I try to reply to them on that third instance, they'll never see it because they aren't taking any of my mail.

No, the host instance will not proliferate your input to other instances. Only your instance will have that and will only share it with other users from your instance.

e.g. I'm on Lemmy.world. I post on the Beehaw gaming community. Only other users from Lemmy.world will see my posts.

Everything you post in a beehaw community won’t be seen by anyone else. Everything you post in a community of any other instance will be seen by everyone who isn’t on an instance that defederated yours