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why can't we have federated identity ?
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Because then there would need to be a centralized entity to host all user accounts, and we don't want centralization 'round here
You could do what Oauth does, allowing many providers to create credentials. That's what some sites already use to let you login with google/Facebook/etc on their site. Except you theoretically could use any arbitrary sites you trust.
and then when your main instance shuts down you can’t log into any again. So what’s the benefit asides from bypassing defederation? (And this wouldn’t even be a benefit, because instances defederate because they don’t like the users, so if you let people log in with oauth from a hated instance then you’d also get defederated
The problem already exists now, having oauth wouldn't change anything.