What Is Federation
The Technopedia definition of Federation
In a fannish context, what Federation means is that individuals within fandom host servers that run one of the Federated Platforms, which allows us to interact without relying on a centralized platform like Tumblr, Twitter, or Facebook.
This means that when someone like Tumblr changes their TOS, it won't affect us. If the instance you're on changes their policies, you can move to another instance and still follow the same people (unlike if you went to Twitter and tried to follow someone on Tumblr).
Because these platforms are open source, we can also change things that we don't like about them directly, instead of waiting for a corporation to listen to us when it might not benefit their bottom line.