Find My iPhone primarily uses the phone to self-report its position when requested over the Internet.
This new "Find My" network (what a stupid name, btw) also allows to use other devices to report positions of nearby devices for those that don't have a data connection (AirTags or iPhones that were powered off).
The problem seems to be that a single toggle controls both features, while the first feature doesn't rely the community network and should remain available even if you opted out.
As others are mentioning, I see two toggles, and the second toggle is "Find My network" which is the one that works by other people's iPhones detecting your iPhone even when it's offline, in power reserve mode, or powered off.
This new "Find My" network (what a stupid name, btw) also allows to use other devices to report positions of nearby devices for those that don't have a data connection (AirTags or iPhones that were powered off).
The problem seems to be that a single toggle controls both features, while the first feature doesn't rely the community network and should remain available even if you opted out.