I think that this button defederate your content, not the content from other instances.
if you want to block another instance, you can click on its domain name (between bracket) and block it. like you'll block usual magazine
you can also type this in your url to access a domain : https://kbin.social/d/*name of the domain* like kbin.social or lemmy.whatever
then you can check the magazines and domains you blocked in your profile's settings.
but it's still a bit buggy and need some work to work correctly.
EDIT: this doesn't block the instance, but only the domain. new tool coming soon, confirmed by the main dev:
domain blocking existed long before federation. It serves as a way to block sources like youtube.com, spotify.com. Blocking instances will be a separate option in the user profile soon. I will submit a pull request.
themadcodger