Federation is a bunch of websites that agreed to share their content between themselves. They use an agreed upon protocol for threads, posts (or whatever you call it) and other websites can fetch these posts. These websites are called “instances”. That also works for users who can comment, upvote or whatever on any post and their comments and upvotes will go to all other websites that are in the federation.

For anology, you probably know how tweets are usually posted as screenshots on reddit. Imagine you could have that tweet just show up in reddit as a regular post. That can be done if Twitter and Reddit would agree to federate with each other and use one protocol.