To be clear, Stack Exchange buys image hosting from Imgur; images are hosted on a separate domain and don't get any of the cruft folks are complaining about here. This relationship has been in place for years and has been mostly pain-free for a involved.

Source: I work for and use Stack Exchange.

Wow that sounds strange coming from StackExchange. It seems hard to believe imgur would have a cheaper way to host images than what SE could get, and it's not like an image upload page is that difficult right? I suppose it's one less thing to deal with does it make that much sense? (Honest question, not trying to "weekend project" imgur.)

Images aren't exactly a core requirement; if someone else can handle that without a significant down-side, then why not free up people to work on other things?

Plus countless forums and community sites around the internet. And it's not like redditors will switch away from imgur all at once, it's going to be a long process..

Just for profile avatars, right?

It's used for all the images on the site.