As you may know, Google’s goal with Wave is to eventually replace e-mail.  While that seems unlikely to happen, federation is certainly a key to even discuss it.

As TheNextWeb says:

Google Wave has been designed from the ground up to allow federated distribution models, meaning you can build and host your own Wave servers, e.g. for your corporate users, and make them talk to other Wave servers. It’s very much like the distributed nature of SMTP based email transmission, but technically way more complex due to the real-time nature of the service.

While federation won’t affect most users for now, it could be essential in the future.  For example, your business could host it’s own Wave server.  Google doesn’t think it will ultimately succeed if they control every bit of it, so opening up the federation protocol could help drive its long-term growth.

Post from: Google Wave Info

Google Wave now open for federation