I used Slide app for reddit which has the same design. It's not about federation, but the function as a link aggregator. For posts that contain a link, it's the link's domain. This post doesn't cotain a link, so it's "local" in that sense.
However it could become really confusing when federation is considered. If someone blocked the instance's domain, the post won't show up besides it's supposedly from fedia.io.
Maybe it's better to use Hacker News' approach: hide the domain if it's fedia.io. Show the domain related to federation in magazine name.
Ok that makes sense. Basically like "self" on reddit, which was also a bit confusing. It should probably say "article" or the instance it came from as you suggest.