Federation refers to using multiple Sourcegraph servers together, each of which is responsible for a subset of repositories.
Currently the only supported federation use case is redirecting your Sourcegraph instance's users to Sourcegraph.com for public repositories (instead of mirroring, analyzing, and indexing public repositories on your Sourcegraph instance).
We plan to enhance federation in the future to support merging data (such as cross-references) from multiple Sourcegraph instances, sharing user accounts, etc. Post an issue if you have a specific feature request for federation.