My main issue with it is the fracturization of communities. If I understand it correctly, someone could create a "cars" community on lemmy.world and someone else could create a "cars" community on another instance. Neither community gains enough traction to take off but if they had all been one it would have worked.

That seems problematic to me. Am I understanding it wrong?

There's already a lot of traffic on Lemmy. I'm constantly surprised to see posts with 400+ responses. I think it's already hit critical mass (Enough activity to keep people here).