Because some instances that aren’t managed well can just have tons and tons of spambots signing up constantly such that it’s not practical to ban individual accounts. Especially since most admin and mod teams are small on Lemmy. There are also literal nazi instances that exist just to go out and harass and threaten minorities or people they hate. While you could ban all the users it’s a lot easier to just block the whole instance.

So while I agree with you that it’s overused, I don’t see how completely disallowing it can work. Not sure what a better solution would look like though.

This naively assumes there aren't malicious or extremists instances hell bent on brigading others in the fediverse. Without defederation, they can keep spinning up accounts to bypass individual bans until mods are overwhelmed.

Every instance retains their respective right to block who they deem a risk whether that's an individual or instance. As an individual, you are more than welcome to create a separate account on another instances if you disagree with your current instance rules or bans, as is the nature of the fediverse.