Federation addresses the cost of large scale hosting by allowing smaller severs (with less users) to connect and form a greater whole. While a flagship Lemmy instance will form and likely already has with .world, in an ideal world users are spread across variety of different instances. In an even more ideal, different topics will have their own instances and general purpose ones are secondary. If you want anime you to to lemmyime, if you want recipes you to lemmecipes. Not, if you want anime and recipes go to lemmy.world. Essentially you want to spread the burden as evenly as possible.

With instances closing, as it stands you lose your account and all things tied to it. Lemmy is still new and I image this will be addressed with something like account migration. So for now, don't get too attached to any singular account. I've recently switched my browsing from lemmy.world to lemm.ee, but remember I still have access to all content from lemmy.world and other instances (addressing your point about more content and engagement).

It's perfectly fine to use large instances, they're likely to have solid footing. Just know there's going to be growing pains as Reddit becomes more shite. Donate if you can.

The first two points could be answered better by other people than me, since I'm not super sure on them either. But the third one is basically that. You can subscribe to all other instances' communities regardless of which community you make an account on, so the lemmy model/fediverse itself is the solution/answer to how distributing wouldn't make you lose any data. As long as even one person from your instance is subscribed to a particular community on a particular instance, that content will show up on your instance too, it's basically instances that subscribe to each other. Having bigger instances doesn't really affect on the amount of in-house content as much as the costs of keeping up with it.