This has definitely been a problem with communities being created on the bigger instances and not utilising smaller instances. Happy for someone to say I'm wrong etc, but I think there would be merit in capping instances to x number of users or communities, to force the user base to spread out.

Also, the way signups work, (ie you find a community you like then click sign up but that signs you up to that instance), further exacerbates the issue and the confusion around how federation works. The sign up links on each instance should lead either to a page with an instance finder, or to a random instance that matches the profile of, and is already federated with, the instance you were on. Otherwise the larger instances have a monopoly and are just going to lead to a bad user experience when they can't cope with the traffic.

It's a self defeating prophecy if users only want to sign up to the instances with the big communities, because then everyone is going to keep creating communities there and nobody is going to want to join a smaller instance.

I might be talking nonsense and am happy to be told why that is all wrong :)