Mastodon instances are like email providers.
You can have a gmail account, a hotmail account, a vapeblog.com account, and everyone can email each other. On mastodon you can toot (like tweet, lol) or follow anyone (as long as they're not private) they'll just have a slightly different display name. These are always formatted as NAME@INSTANCE, with the instance part hidden if you're on the same instance.
The point of instances is that they're run by individuals, usually for specific things, and you can get a feed that is everyone on the instance, or a feed that is everyone followed by everyone on the instance. These are probably cool features if you have a hyperspecific instance (retro gaming, furry porn, infosec) but are mostly useless on the big instances.