This means that all content from communities which are hosted there is hidden. Posts from users of blocked instances are still visible in other places.

Cool! Although it's not quite what I imagined. It's widespread problematic posts and comments from users on instances I'd want to block in other communities I do follow which I was thinking of, and those wouldn't be affected? I have not seen a whole lot of it so far, but I saw enough to think about it a little.

It might be more complicated, as I suppose you'd have to hide all the replies to comments from user-blocked instances as well. Maybe it could be done client-side? Seems like giving users that option would mean less motivation for defederating.