There's a more simple answer for bottle size which no-one seems to have touched on. For safety, cyclists need one hand on the bars at all times, which means any water bottle needs to be able to be used in one hand.
Yes I'm sure many of you can ride no-hands on flat pavement - so can I. Now show us in town in traffic, or on a trail, or when you're trying to keep up some decent speed on a road. I'll bring a dustpan and brush to scrape up the remains when you become one with a car/tree/rock/wall/post. In real life, you need a hand on the bars, and you need that hand to be holding you steady without bottle-wrangling affecting your stability.
Your first problem there is that litres is a unit of volume. As I've said, you need to be able to pick your water bottle up with one hand. That means the limit of the bottle circumference is about 50% more than the circumference of you touching thumb and middle finger together. If the bottle is wider than that, you can't grip it. This is why we have a fairly standard top limit on bottle diameter (circumference = pi times diameter), because we can't get a good grip on anything larger.
With that limit on diameter, you've fixed the cross-sectional area of the bottle (area = pi times radius-squared). The volume of a cylinder is area times length, so the only way to get more water in is to make the bottle longer. This is going to create a problem putting a cage on either downtube, because longer bottles either just won't fit, or at best will be hard to get in and out of the cage. It turns out 1l volume puts the bottle length at pretty much the limit to fit inside a bike frame.
Your second problem is the structure of the bottle. The bottle needs to contain that water without deforming significantly from the water pushing out or your hand gripping it. The greater the volume, the longer the bottle, and so the thicker the side walls need to be to stop that happening; or you need to change materials to something else which will either be heavier or more expensive. It doesn't matter for a normal bottle of soft drink, because you can hold the bottle in both hands and pour carefully, but you don't have that option when you're cycling. For a 1l bottle, regular plastics tend to be fine; but if you were to take this up to 2l then you'd almost certainly need to switch to a metal bottle, with the obvious disadvantages in cost and weight.
And your third problem is that you need to be able to pick up that bottle without the lift affecting anything in your body posture, and without having to brace more with the other hand (beyond what you'd need to ride one-handed, of course). The heavier the bottle, the harder this is to do. From personal experience, I find that it becomes significantly harder when you're lifting more than 1l. Of course we can easily pick up more than that, but the next time you do, check how your body reacts. If you do get more tension across your shoulders when you pick up that weight, then that's more than you can put in a bike bottle.
All those factors combine to put limits on your bottle size. And in practise, they all mean that you don't want more than a 1l bottle.