You understand correctly. Migrating an instance would involve updating the source of truth to a different instance, and somehow notifying all other instances to stop checking the old instance and start checking the new.

Maybe ActivityPub (the protocol the Fediverse is built on) already has a method for assigning redirects, but I would have so many questions. What happens to instances that are experiencing an outage during the migration? What happens with blocked instances if that block is removed after the migration? How long would the redirect notice live? What if a new community with the same name is created on the original instance? What happens to old links pointing to the old instance? Personally, implementing such a feature sounds like a huge headache.

As for what happens to an an instance once it is orphaned (say the instance with the "true" community blocks another instance or goes dark), then the orphaned copies will become little islands that are only accessible to members on the orphaned instance and any comments, votes, etc are no longer shared across the Fediverse.