In your example, people who have the "bad instances" blocked won't see the replies under the posts in question, as the instance will not fetch replies from said source.

With how Mastodon works as well, it won't fetch replies from instances until they're known either, so brand new instances aren't going to flood popular comment sections - this is a bit of a con though in a way, as it degrades the user experience when trying to read threads and causes people to constantly post the same stuff as they can't see all the replies.