And if someone does try to monetize a federated instance too hard, people will just move to a different instance. I have no problem with ads on Lemmy/kbin because it's inherently self-limiting in how intrusive they can be.

Isn't each instance copy the data (posts and comments) from all other instances? This will scale infinitely which means each self hosted instance needs to be upgraded periodically as the userbase grows. Which will cost money