Instance are far from being simple proxies. While instances can act as proxies for other instances, the aim is to have each instances to have their own communities and be somewhat self sufficient. If you remove the federation, Lemmy (and other fediverse software) still work, it’s just that it is more difficult in that case to reach a critical mass of users.
We lose the communities from that instance, yes. And that’s why people want to make sure you don’t have one dominant instance on the threadiverse. But frankly that issue will be there unless you have a fully decentralised system.
That being said, other instances will have a cache of the activities happening on this other instance. You can then fairly easily recreate it from this cache, and if you have a lot of storage, can also have a limitless cache.
To be fair, I am sure many people also have multiple accounts on the same instance. I am not sure what is the proportion between people opening accounts for backup like you and people just wanting alt accounts.
I agree with you on proxy.
For hub I am not sure, that sounds a bit more mainstream to me, with the caveat that English is not my mother tongue. That gives a nice image that an instance is basically an access hub to a whole universe of data.