“Instance” is programmer lingo. Roughly, it’s when you have the same piece of code running multiple times with different values (as part of the same system). More narrowly, “instance” is used in the context of classes. All lemmy instances run the lemmy code but with different users, admins, and so on. The expression makes perfect sense, but it is not used in a formal way.

A lemmy instance runs a web server. Wikipedia says that when you host a web page under a dedicated domain name, you have a website.