Worth mentioning:

• Lemmy itself is an open source software. It’s developed by a community, and was originally created by two developers. It does not make money, except from things like donations or patreon.
• Lemmy instances are run by different members of the community. Various folks have answered ways that instances could make money but may not make money in any ways.

Others have answered the crux of your questions, which is that it’s basically donations… either from the admins by providing free access to their server, or by the community through Patreon or whatever.

But to put into context how much money we’re talking about…

• A server to host 1k active users and 5k-10k registered users, you’re talking about a 4cpu-8cpu box costing less than $20/mo. Plenty of nerds with decent jobs in wealthy countries are willing to write that off as a donation. This covers 99% of the <1k Lemmy servers in the world.
• The 10 biggest Lemmy servers still only have hosting costs of $50-$300/mo. That’s not nothing, but there are probably 10 wealthy nerds in the world willing to write that much off each month. And those costs can be offset through community donations. These servers support 10k-40k registered users, it doesn’t take a ton of donations to cover that modest expense serving that many people.

Now, if you count admin/mod time and expertise, of course… those costs would be huge. But those people either volunteer or get a bit of money from non-profits. But the hardware costs are modest.

I patreon $5 month to my server - startrek.website

It’s non profit by default, the very thing that social media needs.

People who run Lemmy servers do it at their own cost. That’s not to say they can’t run ads or choose other ways to become profitable. The big difference between a lemmy instance and something like Reddit is that anyone can start a new instance if the current one goes to shit. If the admins do something the users REALLY don’t like, they can migrate to another instance way more easily than switching platforms.

Reddit is counting on the effort of switching platforms being too high for lemmy to gain traction. They are wrong.

The developers do it for free, which is common in the open source community. There will always be volunteers to build the software and donors to support them.

since it’s all federated it’s most likely donations and out of pocket. the real risk here is that as communities become more and more centralized, the cost to operate increases significantly (the lemmy.world guy had to upgrade servers at least twice during the boom). there’s a chance that these instances won’t stay around long term, i’m not sure how the lemmy code base deals with instances dropping off. does everyone lose access to all of those servers? since your account is associated with that instance do you not also lose your account and posts?

That’s the neat part. You don’t.

For now it’s mostly donations. I imagine later down the line some instances might start running ads. Or even a subscription model to have an account. Who knows?

That’s the nice thing about the fediverse, all these instances can have their own ideas about how to monetize, and if one fails to stay upright another can always take its place.

The world’s most popular fanfiction website, Archive of Our Own, runs entirely on donations so it’s certainly possible to run a website with a big userbase on donations only, although the website in question does not host images or videos so the situation is of course a bit different. But a dedicated userbase can actually make a donation run website possible.

A mix of donations for the larger instances, and some self-hosting for smaller instances. E.g., lemmy.world has a couple of links for Donations in the sidebar. Kbin got some seed money from NLnet.

The whole thing is federated, so this costs are distributed, and I’d imagine largely pro bono.

TBH I want a option to enable ads to support my instance since I can’t donate money. There should be a way to opt in ads . There will be a lot of people who will be willing to enable it to support their instance.

Right now, this is a service being provided largely by volunteers, with some help from donors. For example, the lemmy.world instance is run by the same person as mastodon.world, who has posted some information here about the costs and donations involved in running Fediverse services.

As it turns out, it’s not super expensive to run a public-facing Internet service with a few thousand users if you’re interested in doing so as a hobby activity. And a lot of folks are willing to donate to help the project along!

More generally: Over the history of the Internet, new services have often been prototyped by researchers, students, and hobbyist volunteers. These folks are expecting to spend a little money to make the service work, and usually enjoy it when people using the thing they’ve built! They usually don’t have an immediate need to monetize everything, but they often accept donations if you’re enjoying their work and want to contribute that way.

They print shitcoins and sell them to dummies.