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Federation is the reason I'm allowed to comment on this post, even though I'm on sh.itjust.works and not kbin.social
It simply means that the instances (different websites) are connected, and you can see content from any that are federated as well as create posts or comment anywhere.
Defederation is the opposite. That is your site deciding that you'd rather not have you, or any users on your instance, see or interact with other instances.
The best analogy here is always email, because everyone is familiar with it and it's the original federated technology.
No one company owns email. There isn't an email.com that you sign up to for email and controls the whole thing. Instead, email is a specification of communication between servers.
This allows multiple organisations to set up email servers that talk to each other. We can pick the email server that's best for us and we'll be able to talk to anyone on any other. You can see this because we can't just have the email address "lotanis" it has to be "[email protected]" so that we know what server the user lives on. Note also they're not running the same software - quite a few of them will run Microsoft's email server, but Google will run their own and other people will be using open source software.
Defederation in the email world is one server choosing not accept email from certain other servers, e.g. because they don't vet their users and produce a lot of spam.
All of this works the same in the fediverse, but the underlying protocol is called ActivityPub. You have multiple Lemmy instances and it doesn't matter which one a community is on you can still follow and comment. You don't even need to run the same software, Lemmy can talk to Kbin etc.
Defederation has happened in the recent Beehaw case because there are a couple of large Lemmy instances that let in users and Beehaw doesn't have the moderation tools they need to create the community they want so they've just disconnected from those large instances.