Difference between List Definition, List Template and List Instance

List Definition:

A list definition defines a schema for a SharePoint list. It contains information on what views are being used, which columns and content types are being used, and other metadata information.
 

List Template:

A list template can either be created by end users through the SharePoint user interface using an existing list as a pattern or using an existing list instance. If based on a user-created list it is called a custom list template. A custom list template includes everything that defines the list, including list columns and site columns used by the list, content types used by the list, views defined for the list, and so on.
 

Tips

A list template may sound like a list definition but they are effectively the same thing, a pattern for a SharePoint list. They differ mainly in how they are created:

- A list templates are created in SharePoint or SharePoint designer.
- A list definitions in Visual Studio.

List Instance:

A list instance is an instance of a specific SharePoint list definition or list template. All of its data is stored in the relevant content database. Typically a list in SharePoint used by end users to enter and view data and it is based on either a list template or list definition.

References:
Addison Wesley - SharePoint 2010 Development with Visual Studio 2010