I jumped off the boat of llm a little before MCP was a thing, so I thought that the tools were presented as needed by the prompt/context in a way not dissimilar of RAG. Isn't this the standard way?

You _can_ build things that way. But then you need some business logic to decide which tools to expose to the system. The easy/dumb way is just to give it all the tools. With RAG, you have retrieval step where you have hardcoded some kind of search (likely semantic) and some kind of pruning or relevance logic (maybe give the top 5 results that have at least X% relevancy matching).

With tools there is no equivalent. Maybe you could try some semantic similarity to the tool description, but I don't know of any system that does that.

What seems to be happening is building distinct "agents" that have a set of tools designed into them. An Agent is a system prompt+tools, where some of tools might be the ability to call/handoff to other agents. Each call to an agent is a new context, albeit with some limited context handed in from the caller agent. That way you are manually decomposing the project into a distinct set of sub-agents that can be concretely reasoned about and can perform a small set of related tasks. Then you need some kind of overall orchestration agent that can handle dispatch to other agents.