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How will lemmy instances survive if they get too big?
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Is there a point where there are so many instances that propagating all that data is too taxing and worse than having fewer bigger instances?
Yes, that becomes a concern as the network size grows and the amount of aggregate replication traffic increases. Mastodon has like 10x the server count of Lemmy, though... so that's hopeful. They do use ActivityPub differently though, it possible that federation scales differently between them.
This GitHub issue has a lot of good (but rough and high-level) thoughts on future scaling techniques: https://github.com/LemmyNet/lemmy/issues/3062