I’ve seen that communities have their own rules on here, but do instances have their own as well? Do some instances allow NSFW communities and others don’t?
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Yes, instances can set their own rules. Admins can remove content created on their instances that violate said rules.
Instances can also block posts marked as NSFW altogether, or specific languages.
One instance can also block another, so while they do interconnect, posts from a blocked instance will not appear in the “All” feed of the instance that blocked it.