no instance would be able to scale to the point where it can compete with Reddit for example

Well I think that's part of the point of the Fediverse: No single server has to scale that much. Sure, the big ones are going to get big and stay big, but no one Lemmy server is ever going to have as many people using it as Reddit does. That means the cost of each instance is going to be tiny in comparison to what Reddit spends to keep one big monolithic site running (which is easily in the millions). Fediverse will distribute users across many instances/platforms which also distributes the cost. Not only do users have many Lemmy instances, they've also got kbin, and mastodon, plus any other platform that joins ActivityPub.

Reddit/Facebook style monolithic sites are not viable. You see time and time again these platforms desperately trying to monetize because it's so expensive to run. Fediverse can have millions and millions of users, but no single entity will have to foot that bill.