I would say it is more about range and a minimum of 200 miles/320kms is enough in most parts of the world now with another 50miles/80km needed in a few other places.
Bikes are more economical now and those large tanks were needed on airhead BMWs which only did 50 mpg on a good day but some modern medium sized bikes can do 80 mpg.

As mentioned above - its about range, not about how many liters you get into the tank. On a Honda CT 125 Hunter Cub for example with a 1,4 US gallon tank/5,3 liter you will get a range of approx 350 kms. So no need for a 35 liter tank on that bike....

There are several things to consider when it comes to fuel capacity and range:

1. Where are you going to ride? What range do you need? In remote areas where gas stations are scarce, and sometimes even out of fuel? Try to do some research ahead.....

2. What range do you have? Remember that in some countries in the poorer parts of the world fuel sometimes is of lower quality than in the developed parts of the world. For example in Bolivia the fuel is (said to be) 85 octane RON. Which is approx 80 octane AKI as is the north american standards. In Indonesia the standard fuel is 88 octane RON, approx 82 octane AKI. And less octane number - the higher fuel consumption on modern EFI bikes at least. Carburated bikes might be different.

3. I wouldnt had gone anywhere without a fuel range of at least 300 kms!
A fuel range of 400 kms would actually be a minimum fuel range imo for a decent overland bike.
500 km fuel range - now were talkin.
600 km range and above - luxury!

4. As Grant mentioned above - the oversized tanks that are offered are often very highly priced. So that must also be taken into consideration.

5. I rode around the world with two 3,5 liter jerrycans attached to the rear of the side panniers. What a PITA! I have lost count over how many times I needed to reinforce the attachments of those jerrycans, and I lost a couple of those jerrycans too along the road! And that was with designated cans, designated mounts, designated straps etc etc. I wonder how it would work if one used something more amateurish stuff to carry outside gas in?
Imo fuel should be carried in the main gas tank. Carrying fuel outside the tank takes up space for other items such as water, spare parts, clothes, tools etc etc.
And as in my case - outside carried fuel cans tends to fall off. Maybe those rotopax cans work, but they still take up space for other potential stuff you would like to carry.

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I agree with this 100% but would like to add that when you go to places where those extra 80km just maybe might be required, that you get in the habit of topping up your main tank often (30-50%). The fuel availability of the last 1000 km may be a poor predictor of fuel availability for the next 100km.

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That's a fair assessment.. there isn't that many places where you need 250mi+ range. Still IMO 701LR got it right. For one, even if gas available there could be issues with quality, and on some remote vistas you not only need fuel to get there, but also need to carry extra to be able to turn back at any point.