Instead of ads Lemmy operators should be paid for hosting. Users should be asked for funding on a periodic basis (perhaps a small number of subscribers could fund the entire hosting for all.)

No one should assume this is all free forever.

Would ads be of much value on a lemmy instance? Almost nobody using lemmy would not be using an ad blocker. And if an instance integrated ads, other instances would have access to their communities without ads unless you do some kind of "native content" scheme where some of your posts are ads which I don't think anyone would tolerate.

I could see maybe sponsorships with locally hosted shout-outs in the sidebar working for some people.

The point of the fediverse is that hosts can pick their own business model - free, freemium, ad-supported, subscription. Just like e-mail, you sign up with the provider who provides the type of service you think best meets your needs. If they piss you off, you move to a different provider.

If the fediverse demands hosting for millions of users, someone will make a server to host millions.

I personally think "big" instances should focus on user/identity management, while communities live in small groups on small instances. This lets the identity providers include/exclude with much better granularity (compared to the beehaw mess) making the communities much less susceptible to being collateral damage.

I'd like this to be avoided as much as possible. But I am a bit weary about the fact that even small instances have to copy everything else on the Fediverse and thus will be very strained. Or do they copy the stuff only when their user wants to view it? Not sure how it works.

Maybe something like DuckDuckGo's ads that respect DNT?

I think it's reasonable for some instances, where there's good alignment. There was a thread I replied in a few days back around how/if TTRPG creators(who are mostly small enthusiasts themselves) could advertise in related magazines, and legitimizing that business wouldn't really pose a conflict for the hobby - that's how it was built in the first place! It's just a matter of finding a place for it and defining the technical solutions.

As a general "let in all the advertisers and promise riches for someone" measure, it does cause known problems. There is some freedom to figure out what works in a specific case here, it's not defined top-down since it isn't centralized.

I'd be absoloutely fine with some unobtrusive side bar adds, its only when adds make it difficult to actually use the website that add block turns on.

Ads is what's ruining everything that's good on the internet. If you have two similar platforms and one is run by ads and one by a subscribtion model the latter is going to give you way better experience.