That is correct in theory. But in practice, other servers will block your server if the rules deviate from the mainstream rules, effectively isolating your server.
If your users post hate speech, child porn or run amok reply guying, then yes your likely to not federate with other instances.
For other differing rules, instaces generally silence from the federated timeline. Eg: I can still follow Humblr.social and Sinblr users, but Federated timeline users won't have to drown in porn if the admin silences the server.
Your server will be isolated from some other servers, but it's actually pretty hard to isolate your instance so that you're completely alone in the fediverse.
For other differing rules, instaces generally silence from the federated timeline. Eg: I can still follow Humblr.social and Sinblr users, but Federated timeline users won't have to drown in porn if the admin silences the server.