Pretty much this. DNS, SNI, and otherwise plaintext traffic sniffing. That together with user/device 'fingerprinting' (a much more amorphous concept), and that's why such-and-such thing you were just talking about with so-and-so pops up on your screen/feed/whatever, sometimes only minutes later.

I highly doubt any of this can actually be opted-out of. How else would they stay in business?

The `TS_NO_LOGS_NO_SUPPORT` option opts out of all log collection, and says in the name why it is collected in the first place. Tailscale has support for all users, including free, and having access to logs has to be how they can provide free support. Having quick access to logs reduces the time it takes to handle tickets, so they can help more people quickly and don't need to limit support to only paying users.

The core client code is open source, feel free to inspect it yourself.