yes, limiting users is one tool to encourage users to find another "home" instance that they normally use to browse and post so that the system as a whole can scale better

If there is a performance overload isn't that a natural block to more users?

nope, that would make the experience way worse with federation not working well with communities. like for example I've made a community over on lemmy.world and it has a couple of members and a few posts in it, but I can't see it from any other lemmy instances I've tried (unless it doesn't work if you're not logged in). you can kinda make kbin see it but to make posts appear you have to search for them and if you search for them before you search for the community, they appear in a random magazine and then when the magazine for that community is created the posts that were put in random stay there and never return... so yeah...