An easy-ish way to explain it is to use the example of email. Gmail, Outlook, Proton, your private email server...they all are independent of each other but can interact with each other. That interaction is "federation". Kbin, Lemmy, and even Mastodon, PeerTube, et al can interact with each other even though they are independent of each other, yet alone not the same "usage" (i.e., link aggregators vs. microblogs vs video hosting...).
Defederation simply means ending the interaction. The instance will still operate as is, but will not interact with what it has defederated from. In the case of Beehaw, they still interact with the rest of the Fediverse, but not with the instances they blocked.
To circle back to the email example, if your private email server defederated from Outlook, you'd still be able to send/receive email from the others, but not Outlook.
From the Mastodon blog post about Meta federation:
Will Meta get my data or be able to track me?
Mastodon does not broadcast private data like e-mail or IP address outside of the server your account is hosted on. Our software is built on the reasonable assumption that third party servers cannot be trusted. For example, we cache and reprocess images and videos for you to view, so that the originating server cannot get your IP address, browser name, or time of access. A server you are not signed up with and logged into cannot get your private data or track you across the web. What it can get are your public profile and public posts, which are publicly accessible.