But now with social media misinformation, we are moving from the tutorial of shouting 'fire' in a theater to the boss level whose final form we can only speculate on. That's what in my opinion ought to motivate some fundamental questions about what democracy is actually supposed to be moving forward.
Essentially, I'm totally on board with your failure mode idea: it's just that we diverge on the definition of what democracy is. If the future of society consists in heavy manipulation of information feeds for the purpose of maintaining a specific equilibrium, I believe it is better referred to as a technocracy especially if that manipulation will mostly be done by tech companies and other unelected officials. In this case, if Germany were to regularly curtail certain forms of speech with fundamental consequences on how the broad masses of voters behave (a path it is already on in my view) then it will eventually cease to be meaningfully democratic as the years go by. But I accept and understand that there are other ways of evaluating the situation.
Yelling 'fire' in a crowded theatre is not protected speech, yet we don't challenge the democratic credentials of a nation that prevents that, nor is such a rule considered beyond the reach of democratic governments to change or alter, it is not an untouchable decree handed down by a group of bien pensants. Nor do we say such things about criminalisation of incitement to violence. Perhaps something in this mode of thinking is more appropriate.
And I'm also going to have to say again - this is not something I'm proposing as a solution. I am not even proposing a solution
I am identifying a failure mode in the sort of absolute free speech idealism that is common and particularly in the "marketplace of ideas" concept. I don't know how to fix it but it is clear that it is a threat to democratic principles in and of itself in the face of mass communications. And I disagree that taking steps to address it would necessarily be undemocratic, depending on what those steps are.
By your A and B premises, Germany is undemocratic, even though their rules on holocaust denial could be democratically removed were there the will to do so.