Run everything in docker containers. Much easier to manage than virtual machines and lighter on resources.

Personally, I would prefer docker containers as I can move them to a new server or even create backups very easily.

You want so isolate the things you host from one another (security, making updates easier etc). So if you host just one thing you can do so on the host directly. If you host multiple services you may seek some separation method.

VMs is one method, but it wastes a lot of resources, especially RAM. A more elegant way is containers. Both the docker/podman route as well as the LXC way are quite polular.

If you use a full VM you'll lose plenty of performance and I don't think it'll cope really well with domain names. If you really want to go the "keep everything separated" route use container software, like Docker. It'll use the same kernel as the host, so no weird networking rerouting/bridging etc.. I don't have any experience with containers, since I run all of my "homelab" bare metal on a Pi, and with this approach I never faced any issues. Containers could be useful if you were running something unorthodox like Gentoo and you need to run software that won't work on it, even if compiled to run, but it exist as a package on another distro. Then you can just spin up a container for that distro, install the software et voilà, you're ready to go. AFAIK there shouldn't be a package for lemmy on any distro, so just clone the source code and compile it, it should be fairly distro-agnostic. Maybe you could compile it in a container to keep your host clean of compile dependencies, but other than that, there's no real gain. I like to compile stuff, so having a shitload of dependencies already there is pretty handy for me, but for a production system, it's better to keep it clean.