If it's a browser plugin it won't receive widespread adoption. I don't know what the actual numbers are but I'm willing to bet well over 95 % of desktop lemmy users are using the default frontend despite the many alternatives.
Old Reddit+RES did it right IMO: custom CSS but an easy-to-use toggle on a per-community basis, plus (IIRC) a global toggle in case one doesn't want custom CSS at all.
Custom CSS wouldn't even necessarily have to federate, though it would be better if it did (but there are probably security concerns to address). It's CSS, it's supposed to gracefully degrade; if CSS federation isn't supported, it doesn't break the user experience. That doesn't have to change anything in ActivityPub either, you can just add a custom field for the styling and let clients figure out what to do with it.
Kind of the whole spirit is to give users a tool and no worry so much about the rough edges. Custom CSS doesn't have to work perfectly, it just has to work for most users.
Sure, but community moderators can't. Spinning up my own instance shouldn't be a requirement to use custom CSS.