Instances are like subreddits where the mods are top level admins, and there is no central admin above them. Anyone who wants to create an instance can host their own server. Communities can be duplicated between instances so you could have dozens of c/gaming communities rather than a single community for a topic which stifles engagement a bit. The cost of hosting is paid by the admins of an instance or by donations. Sponsors and ads are not currently feasible.
Unmoderated instances allow any new instance’s content to be displayed for their users.
Facebook. Simple as.