@ggow from what I understand: muting an instance, which blocks posts from it for people who don't affirmatively follow people on the instance. Blocking cuts of the other instance altogether.

From what I've seen, admins block based on pre-determined criteria (e.g., blocking because an instance's code of conduct is "anything goes!") or based on their users alerting them to problems.

Otherwise, the system seems to favor user-led federation.