Shame that option #2 has these downsides. Personally, I’d probably prefer #2, and to live with some broken images.

That said, lemm.ee is one of, if not the largest Lemmy instance, and has a certain responsibility to prioritize usability as a sort of “sane default” choice for many people looking into the fediverse. As such… yeah, I give it to option #3 here. If I (or others) was truly deeply moved by the privacy concern, there are an abundance of alternative options for that higher privacy standard, including full self-hosting.