For each installation of Directory Server software, you can create multiple server instances. Although you may create server instances in the place on the file system where you install the software, nothing requires you to put both the software and the instances side by side.
The Directory Server software you install includes the executable files, template data, and sample files needed to create, run, and manage actual servers. As the software is separate from the actual servers, you can apply patches or service packs to the software without changing the server data. You therefore do not need to patch each server instance, but instead only the software installation.
A Directory Server instance holds the configuration data and the directory data required to serve directory client applications. Although in production systems you carefully control the user identity of the server, you can typically create and run a Directory Server instance as any user on the system. The directory data belongs then to the user who created the instance.
In Chapter 14, Directory Server File Reference, you see that Software Layout for Directory Server is clearly separate from Directory Server Instance Default Layout. In particular, notice that the documentation mentions install-path when referring to the software installation, but instance-path when referring to a server instance.