What are some upsides of software being federated?

The obvious ones - that it's not controlled by a single company, that you share data between instances.

No central entity deciding what you can and cannot see or say

Well, these don't really apply to Lemmy or fediverse microblogging, but interoperability and censorship resistance. These mostly apply to things like XMPP and standards of federation that are widely adopted.

Im honestly not a fan of federation the way Lemmy and mastodon and the like do it, because the servers aren't really communities truly, theyre interchangeable choke points in an amorphous blob. The servers are just there because that's how they built it and aren't really a positive with regard to UX. But, in a system where different servers focus on themselves first, like forums for example, where the users primarily use them to interact on their server, federated architectures enable communication between these communities and that's great. That's how I use Lemmy; I'm primarily on the server I want to use and interact on, and I venture out and engage with others on other servers, but that's not how most people use it, they just pick a server and everything after the @ is meaningless, they're here for the network, and a federated model is not conducive to good UX if the network is the draw.

For things like the fediverse and threadiverse as it's been named, where the network itself is the draw and not the server in particular, I much prefer a nostr like architecture where the servers have little to no bearing on participation and just relay posts and other interactions.

You can't stop the signal!

Normal every day joes can individually contribute to building a service that isn't corporate backed or controlled by investors. This means there's no weird backdoor shinnanigans like shadowbanning or post being deleted/censored just for getting too many downvotes. The fact each instance caters to its own crowd but can cross interact with other crowds is an excellent balance between finding a community that you feel comfortable in but not being in an echo chamber unless you want to be. If a instance truly becomes toxic and starts to attract nasty hateful types of people it can be defederated so the rest of the lemmyverse community doesn't have to deal with nutjobs and trolls.

Users get control and get to truely participate. It's not 100% driven by capitalist motives and tailored to fit the advertising and selling private data market. But that's more upsides of free software... Federated: It's not driven by a single actor to fit their purpose. Instead, I can make it fit my purpose.