Disclaimer: I've only looked a bit at the protocols and high levels descriptions of how it works, and this is just my understanding of it. But it seems to track.

let's take .. Selfhosted@lemmy.world for example. Right now lemmy.world is the Source of Truth on this, which means if you sign up for it on a different host, let's say myawersomeinstance.com, that first contacts lemmy.world, copies over posts, and then subscribes on new posts for that. Actually not 100% sure if lemmy.world contacts myawersomeinstance.com when there's a new post, or myawersomeinstance.com polls lemmy.world.. But anyway, point is, lemmy.world is authority on it. myawersomeinstance.com also have Selfhosted@lemmy.world data, but it's a copy of it. And lemmy.world is only authority. So if you post something, your server then sends it to lemmy.world and waits a reply. Then lemmy.world contacts all instances that has at least one user following this to tell about the new post. And that new post now exists on a few hundred databases.

The problem is the scaling is whack. Okay, you can have 5000 federated servers with users subscribing to Selfhosted@lemmy.world, but that means lemmy.world needs to update 5000 servers per post, and there'll be 5000x storage used for that post, and ALL 5000 servers contacts lemmy.world to get the new good stuff.

Frankly, it's a scaling nightmare. As for a different approach, you could have private / public keys and sign updates from lemmy.world and allow the other instances to fetch the new data from each other. That would also allow more relaxed caching, since it would be generally lower cost to re-fetch the data. Now you need aggressive caching because you don't want lemmy.world to keel over and die form every server on the planet wanting to hear the latest and greatest posts all the time.