@Namnezia Yes, defederation breaks the connection between two servers so that accounts on one server do not see activity from accounts on another server. I'm not sure of the details of how it works when a third party is involved (e.g. both responding to a post on a third server), but I think they simply don't see each other's posts.
@DecaturNature if you are in an instance that is defederated, nobody can see your posts?