Number of (active) Lemmy users seems to stabilize and I think this is a great thing. Indeed we got a lot of users when reddit shutdown its API (I was among them despite being a long time oss user), many have left, but the community seems now to stabilize to ~ ½ of the big grow in june '23. I think this is very nice for lemmy, we can be proud of this project.
The stats come from: https://fedidb.org/software/lemmy
No, that's not how it works. Instances absolutely interact, that's the whole idea of federation. It can get more complicated than that if you want to get into the details of how it works, but that knowledge isn't in any way necessary to just use the platform.