@PeterBronez As I recall it, your summary is broadly correct *except* for (1) which should be more like "for each book, Internet Archive legally possesses X copies, and operates a digital library to lend them out as ebooks, limited to the corresponding X copies lended at a time".
In other words, very close to loaning an item under first sale doctrine, except the intermediate step of digitizing the work and being able to loan it out at a distance.