I see nobody else explained, so I might as well.

Each instance has their own users, communities and rules. A user can subscribe to any community on any instance that's not blocked. Sometimes it's important to know the rules of the instance the community is on, because different things are allowed.

If I'm a user on lemmy.srv.eco, for example, I can still subscribe to any lemmy.world community and post/comment/vote just like a lemmy.world user.

The only real downside of being on a smaller instance is that you'll have to do a bit more work actively subscribing to things. An instance only pulls in a community if at least one user subscribes to it. On a big server, your all is very full of communities as there are more people subscribing to more diverse things. On a smaller instance, you'll need to do that yourself.

The advantage of being on a smaller instance is that with less load on the server, it'll work much faster.