"Instance" seems too jargon-y to me as well, and "proxy" is even worse. "Server" and "host" are probably a little more familiar, but are still technical language.

Confusion doesn't stem from individual words; people need explanations and examples, but, as an alternative to "instance", if you want to extend the "communities" metaphor, then "society" as a cluster of communities is a natural option, particularly since it relates to the widely understood concept of social media. Since most people using the Internet also know what a web "site" is, you could use the sibilant linguistic association to help cement the notion:—

Each society has its own web site, such as:

• aussie.zone, where the communities relate to Australia;
• programming.dev, where the communities discuss software development;
• and lemmy.film, where the communites are about movies.

You can choose which society you want to join, although some will ask you to fill out an application. Most societies have connections to others, meaning that you can discuss things with people who are part of different societies. Often, you'll recognise them by their username saying that they're at (@) another site. Not all societies get along with one another, so which one you join will also affect who you can talk with.

Each society has its own rules it expects you to follow, whether you are a member of that society or just visiting.

This kind of language seems more intuitive to me anyway, although when I've tried describing instances and federation before now, I've likened instances to countries:—

You choose somewhere to live (and you can move later if you want). If there's a cross-border agreement, then you can send messages back and forth between people in each place.

but this has also meant stressing that your instance "country" doesn't have to match where you physically live, so a more general term probably would have been more useful.