Not OP but I want to point my dns at a host and have them handle it.

You can pay for that service, but you have to administer the instance, and it’s not able to reuse the servers RAM for multiple domains; it’s not like email where spam management is built in.

I'm not too clued in with how federation works - but is this practical?

Doesn't federation require admins of both instances to agree to federate?

If so, I could imagine it not scaling for larger instances that could receive 100+ federation requests a day.

Further, you would have to repeat this step each time to encountered a new instance you wished to participate on.

Is my understanding of the federation process correct or have I totally missed the mark? :D

The federation is opt-out, so by default an instance will accept any federation request. You only block bad instances after the fact (or use some kind of shared blocklist)