It's a major maintenance pain, doesn't work on mobile (we had to make a killswitch for it to not open on mobile), relies on an old js library to handle url hash changes instead of the standard and cleaner pushState (not available for IE9 so core couldn't use it anyway, but contrib could). And as webchick very rightly points out: "once the Seven style guide is all done, there's a clear enough boundary between "front-end" and "back-end" that the extra chrome is no longer needed".

List of issues that can't be fixed properly because of overlay:

#1129578: Overlay doesn't respect internal anchor links

#2078951-19: Highlight the row of block that was just placed

Other made really complicated because of it:

#1440628: [Meta] javascript toolbar/tableheader with url fragment mess

#655388: Many ways to lose data on form input in the overlay

And that's just the open ones.

Related: #1889150: Simplify overlay look, *only use for contextual operations*.