Imagine if there's a club where people dance. It's great fun, but the club is owned by a single person. That person has the final say in all decisions: what dances are allowed, which clothes are acceptable to wear, which food you can bring, etc.
This is often good: it is an easy way to avoid people bringing stinky food to the club, ruining the experience for many others, or people dancing in a way which might make others uncomfortable.
However, that person (and the person helping them, either employees or moderators) is in turn also able to make decisions which aren't very popular, like suddenly requiring an ID check to get into the club.
Some people who wanted their dancing not be directed by person disconnected from their life then went ahead and made their own club. But the question was: how can they avoid that they become like the jackass who wants to dictate how people dance?
The answer: federation. People can use their membership in those new clubs at other federated clubs, enabling them to freely check out other clubs without any hassle.
The customization and community aspect is a nice side-effect: there are now clubs focused on e.g. classic dances, who might go for a more classical design of their dance halls or have a certain dress code.