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Decius comments on Why do theists, undergrads, and Less Wrongers favor one-boxing on Newcomb? - Less Wrong
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The one-boxers had a choice between $1m and $1m+1k; the two boxers had a choice between $0 and $1k. The "instead of" refers to their reward if they had done the opposite of what it had already been predicted that they do.
The problem statement is assuming a perfect predictor, though, so that 'instead of' clause is mostly noise.
Yeah, it designates the counterfactual; what they didn't take.
It's not referring to a possible state of reality.
In which case there aren't possible states of reality; only exemplified and counterfactual states.