The image link example in my comment specifically pulls the image from imgflip, it doesn't end up on a Lemmy instance at any point

The image is still hosted on that other site, but embedded in the comment. Possibly it gets cached by the instance, but the link to the original image remains intact.

It's like a link but with an ! added to the front. Actually I think you can do alt text (ie image description for eg. screen readers) like this ![alt text](https://i.imgur.com/cYSpqUC.jpeg)

Edit: yup it works

You mean the "upload image" button under the comment field next to the other formatting buttons? Or for posts?