this post was submitted on 12 Jun 2023
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What you're describing is no longer federation but full P2P. From a purely technical point of view, it may work, but the biggest problem will be abuse (spam, excessive resource use, illegal content). When a new instance shows up, how do you know if it's a spammer or not? And if an instance is blocked by another instance, whose side should you be on?
It wouldnt really be full P2P: I'd expect moderated communities to act as a funnel which everyone interacts with each other through. I wasn't really considering the hypothetical micro instances to be like a normal server, since even when federated its unlikely that they would consume as much federation bandwidth as a large instance. Most people wouldn't run a community, simply because they don't want to moderate it.
Realistically, the abuse problems you mention can already currently happen if someone wants to. It's easier to make an account on an existing server with a fresh email, spam a bit, and get banned than it is to register a new domain ($) and federate before doing the same. I think social networks would have a lot less spam if every time you wanted to send an abusive message, you had to spend $10 to burn a domain name.
Most of the content would still live on larger servers, so you end up moderating in the same place. Not much difference between banning an abusive user on your instance and banning an abusive single-user instance.
I hadn't even thought of the moderating yet.