Think of instances (lemmy.world, kbin.social, sh.itjust.works, etc.) like planets. Each planet contains cities (or subreddits communities). Most of these planets are federated meaning that if you were born on one planet (have a login) then you can travel and participate the galaxy of cities and planets. If a planet defederates, then you can no longer travel there if you were not from there.
If I understand correctly, local only shows your planet and you can participate fully.
All shows the entire galactic federation (though you may only get to sightsee other planets, but not talk to the locals without getting a visa (login credentials for that planet))