If a server decides to cease to exist, does all the user data go down with it? I'm guessing so, along with a all comments/post/communities made from that instance and only cached data will remain.
It is just as you said. As an example you can look at heapoverflow.ml which got domain high jacked. It is down but the content is still available on other instances:
That's cool! Not that the domain got hijacked, but the fact that the content is still available on other instances. This is brilliant and shows you the benefits of federation VS centralization.