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It would put the more popular instances under enormous stress, if they had to serve every single subscriber from any other instance. This would also kill the user experience. It's much better to serve everything locally, so that an instance admin can scale their resources to the number of users on their instance, a number they know.
I actually am interested to see how the fediverse's concept of federation scales out, as numbers keep growing. Even with just instances syncing between each other, I feel that this might be too much at a certain point.
From what I understand, media (images, videos, etc.) is not cached. Does that not mean that, in the worst case where every post contained an image, the instance would be serving every subscriber, anyways?
For binary data that is correct, yes. But that is stuff an instance admin could choose to hide behind a CDN, as it's easily optimized and cached.