My current use case is I have an adguard home DNS filter that is currently blocking some lemmy servers. (eg: lemmynsfw)
I understand that it'll cut out any direct resources from that lemmy server, but I suppose since it's federated lemmy.world is acting as a proxy and thus the posts are still visible?
More generally speaking, is it possible to block an entire lemmy server at a network level? (DNS filtering or otherwise)
Nope, not from a DNS level. All the posts you are reading are cached by whatever instance your account is on. Basically the only thing served from the remote instance is full-size media uploaded to that instance. Even thumbnails are served from whatever instance you use. Mastodon/Akkoma/etc can be set up to even proxy full-size media for users, which is a feature I imagine will eventually make its way into Lemmy. Your best bet at the moment would be to find an instance that defederates those you don't want to see (or run your own and do so yourself). I know "blocking" an instance is an often-requested feature, so that may end up a feature in Lemmy itself at some point.
I don't think this is possible through DNS filtering because it is your home lemmy instance showing you the results. You could block specific communities, turn off NSFW posts in your profile, or use a filter in Ublock Origin. These are all client-side solutions and would not auto-apply to a whole network. I don't think there is a feature to block posts from a whole instance without being in charge of your own instance and de-federating. I would wager a per-user instance block will be coming down the pipe eventually.