There’s a whole multitude of resons that could be argued for both approaches. I prefer this option because:

• Most people don’t follow cyber security best practices and reuse the same password on multiple platforms. Currently, you have to trust the instance managers are competent enough to secure their databases properly from unauthorized access.
• Again, your average netizen does not have relay addresses for every service they sign up to. If my instance manager does not like what I say, they can publish my sign up information and dox me. I don’t want instance managers to have this power.
• If I want to use somebody else’s front end to browse on a browser, I have to pass my credentials to them to validate authentication details. Again a huge security risk if the hosting service for the front end is malicious. Why leave this vulnerability when there is a better alternative.

Why would you not want to trust the developers of each fedi software to hold this information, instead of trusting every instance manager to hold this instead? IMO that is a more vulnerable design choice instead of having a central authority managing user authentication, unless I am missing something?