What does settings the instance to private do?

In the settings there's a box "private instance" I can't figure out what it does though.

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The instance settings now includes a private instance option, which if turned on, will only let logged in users view your site. Private instances was one of our first issues, and it was a large effort, so its great to finally have this completed.

From the release notes.

I haven’t tried it but I think that making an instance private disables federation.
- It would be great if it only just let logged in users view the site and not mess with the federation settings.
  
  But that's just how it works anyway. If you want to disable registrations, just disable that instead.
If I understand correctly, it effectively runs your instance in whitelist mode instead of blacklist mode. To federate with another instance you have to explicitly list it as something you'd like to interact with, as opposed to what most people here are used to, where an instance federates by default, and you have to blacklist instances you want to defederate
- By default, federation is disabled and the admin must enable it. Private instance and federation are mutually exclusive.

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