The advantage of federation is you don't need to become big. XMPP works like email; you set up your DNS records and other servers can talk to yours when someone wants to chat with an address in your domain.
Federation certainly helps, in that Americans can run American instances and not worry if the EU dislikes it.
However, federation wouldn't help EU users much if the EU state decided to go for full-on Chinese style control, firewalling the foreign-hosted instances, banning the apps from the app stores, blocking access to payment infrastructure, jail for anyone found with the app sideloaded, PR campaign saying this app is used for child porn and encouraging people to turn in anyone they see using it to the cops, and so on.
It's all fun and games until you get blocked at the DNS level and effectively shadowbanned by all mainstream ISPs. This already happens today in many, many European countries.
