The fact that mastodon apparently doesn't scale well could be a feature rather than a bug. You probably don't want thousands of users on a single server, since that brings with it all sorts of problems - social, technical, economic.
@bob at a social level, large instances make the stream unusable; it blurs by too quickly and has too great a variety to make sense of.
Right now, 3-4000 users is a nice size for a local community with a reasonable number of connections.
As the federation grows, and therefore also the number of potential connections, we may see the optimum instance size go down rather than up, until we reach "Dunbar's number" of 150 members in a community.