Federation is the process that pulls content in from other servers (e.g. lemmy.world, beehaw.org, fedia.io, mastodon.social, etc.) All of these different servers can communicate and share content with each other.
If you turn federation off, you only see content from your "home" server, which in your case is kbin.social (in mine it's remy.city).
There is also Kbin (that I use) which can communicate with Lemmy. Since they both share the "sections/communities/groups with threads in them" concept, they can interact pretty well.
I've seen folks calling it the "Threadiverse" because of the different software that servers run.