I don't think instances re fully understood by the community are they. I mean it's mentioned a lot and referenced a lot but, do we really know what's going on there? How many instances can there be for instance?
The instances are on your own computer, and thus from Frontier's point of view there is no limit to their numbers. Frontier does not have instance servers, they use our computers for that. This is what "peer to peer" means.
What their servers do is to point each player's client towards other players that could host a instance together, allowing players to play together. To determine who can be put together that way Frontier's servers use a number of inputs; the mode (Solo, Group, Open) of each player is an obvious one, but also the quality of the link between the players. Putting together two players with a bad link between them is asking for trouble, making the experience worse for everyone.
And here things start getting interesting. If your ISP doesn't talk well with another player's, then you two won't be put together, even if you are cruising the exact same spot in space. A routing error can make you unable to play with whole countries at a time. There are a lot of things that can prevent players from playing together in a peer to peer architecture like ED uses, and Frontier would be unable to even diagnose many of those.
Then, there's also the possibility of players intentionally cutting or degrading their links to other players. Some of the tools for this are bundled with the operating system itself, some come with nearly every non-crappy router, and the most advanced ones — used by developers to see if their applications can still work if their users don't have a pristine network connection — can be easily found, some even for free. There are dozens of ways to force ED's servers to never put you together with other players even if you choose Open in the menu, many of them undetectable by Frontier (well, Frontier can tell that the player isn't able to play with others, but telling why would be impossible).
In short: it's impossible for Frontier to truly force everyone into Open with the network architecture they have chosen, as knowledgeable players would be able to play solo even after choosing Open.
Could Frontier change this? Perhaps. At great cost, which would include building or hiring datacenters in every continent, at least if they care about keeping lag low. Even then, players from one continent wouldn't be able to see those from other continents; someone from the US or Europe would be unlikely to be able to directly oppose me, for example.
