An open network for secure, decentralized communication
Next to Synapse and Dendrite, you could also try Counduit (or Conduwuit). I think that project has a future, maybe you want to evaluate it, too.
I'm not sure what you mean by miss out. You obviously can't talk to people on other instances unless you talk to them (federate), but I think that's it. I don't know anything else you'd miss.
More so overall privacy and encryption features. That's all I really care about. Will my encryption become less secure?
I will for sure check out conduit!
It won't get less secure, but you'll likely miss out on future improvements that would make your instance more secure.
Well, encryption stays the same, whether you federate or not. I don't think it makes any difference.
And Matrix is supposed to be used with end-to-end-encryption for the chat rooms. Meaning the server(s) can't read the messages anyways. They just forward them and know who talks to whom, when, how often and the IP address of the device (the metatata). That's what we usually worry about when talking about privacy. That kind of info will stay on your server if you don't federate. But the server isn't going to forward that information without a reason. Even if you activate federation. It only does that if there are people from other servers in the chat room. Your conversation with your friend on the same server, will be entirely unaffected from the federation setting.
I've been using Element X with my dendrite home server in the past. However, you will apparently miss out on all the Matrix 2.0 advantages.