Think of your instance you signed up as as your email provider. Using that email you can send messages to anyone else who has an email. You do not have to pick a specific email provider to use email, gmail, hotmail etc they can all talk to each other. Lemmy works in a similar way except it not limited to DMs, the instance you sign up for allows you to talk to people across all Lemmy instances and see posts from other instances. When you go to “All” on Lemmy you are seeing all posts across all instances. When you go to Local, you are only seeing your home instance.