By default, instances can connect with any other instance, but admins can block instances. The connection is made when a user on that instance subscribes to a community on a different instance. You can definitely run your own instance and just disable sign-ups.

https://join-lemmy.org/docs/administration/federation_getting_started.html

I think it actually drives people away from reddit, since they aren’t finding the content they’re looking for. Just read this post the other day: https://lemmy.dbzer0.com/post/81954