The current lemmy implementation is indeed like this.
Short story, it blocks all of that instance's communities but not their users if you stumble stumble upon them elsewhere. I'm not taking about Voyager, that's how it's done in lemmy backend.
Although, I guess clients lile voyager could potentially implement their own additional blocking that includes users...
this post was submitted on 31 May 2024
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I didn’t know that. I’ll edit the post as a feature request then. Thanks!
PS: Defederation would block everything from that instance, although that isn't a user setting, but an admin/server setting.