The best thing that comes to mind is to maybe have some “special” instance (or just an application, kinda like what Mastodon’s Android app does - at least with the new update) whose purpose is to guide users through sign up and choosing an instance. I think this would kill two birds with one stone. Guiding users through instance-selection, maybe briefly explaining what an instance is and eventually pointing to more user-friendly docs, could already be much more manageable for everybody, and could feel like a more seamless experience, similarly to traditional social media.

That's a very good idea. The website https://join-lemmy.org could have something like that or we could make a new website for it.

People are already adjusting to the decentralized services, but it's possible that they will never become popular enough for most people to have to learn how to use them.