You are correct. Your traffic is routed peer to peer (There are relay nodes available in case your devices fail to find each other. You can disable these in the config if you wish to do so.).
All tailscale provides is an api to let your nodes find each other. However, the concern of the community is that tailscale generates an knows all your wg keys. In theory they could look at your traffic. Personally, I use tailscale happily.
You mean Tailscale generates a hidden master key to which all traffic is encrypted?
This would be a joke back door!
Any link to discussions around this?
The tailscale client generates WireGuard key pairs, but only sends public keys to the control plane. The private keys remain on the device only.
With only the public keys, tailscale control plane cannot snoop on your traffic.
So in short, I thought they basically just helped your devices find each other (and connect to each other directly), not currying any of your traffic. Which is how they can give people so many free devices (100 currently) -- because it doesn't really cost them any work / network load.
Also your devices connect directly over your LAN if possible, which goes against traffic flowing through them.
Please let me know if my mental model is wrong here, I'm certainly no network engineer.