There are two big benefits in my opinion.

1. Speed and responsiveness. When the bigger instances were (or are) overloaded, my Lemmy experience was still fast and snappy. Content was slower to update for those big instances, but navigating Lemmy itself was still fine, and it gave me an opportunity to engage with some smaller communities.

2. Control of federation. I decide who to federate with, and as long as I follow other instance and community rules, I won't get defederated.

The biggest downside is that I can't discover new communities organically since I'm the only real active user of my instance. Nothing new gets federated unless I seek it out. But I solve that by using a fediverse indexer every week or so to search for popular or interesting communities.