From my understanding, Paper and the like are good for Minecraft servers focused around specific mini-games (rather than freedorm building), and are the only sensible choice for servers with many people (or not that many people, but really underpowered hardware).
However, they may be a problem if players are sensitive to possible non-vanilla behaviour (as you mentioned, and it’s not limited to cheaty duping). Thankfully, spinning up a server with a selection of performance mods is very easy these days. Various tricks like pre-generating chunks in advance also help.
It's kinda nuts. The upstream mojang server binary starts to groan if you have >4-5 players on the same server doing stuff. They've really been dropping the ball on optimization in recent years.
Paper is good enough for anyone but very technical players pushing to the limits of redstone tick timing logic, entity behavior, chunk loading mechanics, etc. These don't matter even for advanced players doing normal things.
I actually had to splurge got 2 VCPUs on Digital Ocean to avoid "skipping ticks" and it does sound pretty nuts to me. We play max 3 players. I would expect the server with such a load to be able to run on a slightly tuned up toaster.
It is not cheap for the cloud. Had to use some beefy variety of EC2 medium instance for 4 players or so, with a simple dash for starting it up and terminating, I think using spot instance pricing. Otherwise it cost a pretty penny. At that point I did not use any performance mods, though.
to be fair with the power on most people's laptops and phones now I think we tend to lose track of just how little "1 CPU" is if you're not just running like, a small web app.
It was not always like this. You used to comfortably be able to handle 70+ players in a single server before Paper existed (my memory of this is from before like 2015). You'd need to allocate a lot more memory than normal, like 8 gigs instead of the normal suggestion of 1 or 2, but it could handle it without regular lag.
I forget what heap setting I used, maybe it was 2G, but the old 2010 Mac mini I had as a server would lag if just one player was exploring land quickly (maybe by boat). Was online from 1.5 beta to 1.9 release, no more than 8 players usually.
However, they may be a problem if players are sensitive to possible non-vanilla behaviour (as you mentioned, and it’s not limited to cheaty duping). Thankfully, spinning up a server with a selection of performance mods is very easy these days. Various tricks like pre-generating chunks in advance also help.