Background
Every official playable race in D&D, to the best of my knowledge, is either Medium or Small. Even for creatures that should be Large (meaning where the "monster" versions of such creatures are Large, such as Centaur, Minotaur, etc), the official playable race versions of those creatures are considered Medium, even if they are brushing up against the upper limit of Medium.
There are no official playable races that are Tiny. I was reading this question about issues regarding a homebrew pixie race and using equipment designed for at least Small sized creatures and up. This got me thinking about how feasible a Tiny playable race even is. Before I attempt to homebrew anything Tiny, I wanted to find out any potential problems before getting too into it, much like I did with this question.
Potential Issues
Some issues highlighted in that other question (about pixies) include the aforementioned equipment size issue, but also things like (as mentioned at the end of the accepted answer) flying into the mouth of a creature and entering them, dealing damage on the inside (although this was in the context of enlarging an item inside a creature, but still…)
On the other hand, it's already possible to have a Tiny PC by RAW (although only temporarily) by casting enlarge/reduce on a Small creature (i.e. Gnome, Halfling, Goblin, etc) to make them Tiny. This implies there's nothing that a homebrew Tiny race could do that a Halfling Wizard couldn't.
For this last reason, I could conclude that a Tiny PC race is definitely balanced because a Small PC can be reduced via enlarge/reduce, and anything a Tiny PC can do, a reduced Small PC could also do by RAW; therefore, RAW must already be able to handle anything a Tiny PC can do. However, I believe this reasoning is flawed and that this conclusion is likely incorrect; I believe I must be overlooking something, some "gotchas" or other weird RAW interactions that the game was not designed to cope with.
Question
What "gotchas" or other weird RAW interactions that the game was not designed to cope with would result in a Tiny PC, such as if one were to homebrew a Tiny playable race (such as a pixie)?
For the purposes of having an example, let's assume I want to homebrew my own pixie race, which will be Tiny. I'm not interested in existing homebrew Tiny races, including pixies, since the focus of this question is the balance implications of the fact that it is Tiny, not that it is a pixie specifically. In other words, this question is not "how to homebrew a pixie"; rather, "if I did, what to watch out for".
Also, this is not a duplicate of How to handle a Tiny Player Character in 5e?, because that question is asking for rules that already exist for a Tiny character, whereas I'm asking about unforeseen balance implications of allowing it. The answers there are useful, but they don't quite answer my question, which is about weird RAW interactions (incidentally, the same that would be true for a reduced Small PC as per enlarge/reduce, albeit only temporarily) and I believe that makes my question different.
Best Answer
Many things rely on size or would need to be addressed
Weapon-related stuff
The heavy property:
This used to affect only Small creatures but has received errata and now states:
Just something to keep in mind with this race.
Weapon Damage Dice:
This is more of a realism thing than balance, but imagine a tiny creature using, say, a maul or a battleaxe, even a lance. There's some sort of issue there, so one question is should there be "Tiny weapons", and should they have different damage dice? Note that there are monsters which are tiny and use weapons with damage dice identical to the standard weapon. For example the Quickling's dagger and the Flying Dagger.
Though a major thing to look out for in designing tiny weapons is why wouldn't Small and Medium creatures just be using them? If they deal the same damage and yet weigh less, then they are simply the better option. Something needs to be done to explain either why Tiny creatures can just use regular weapons, or why larger creatures cannot just use Tiny weapons.
This section of the Dungeon Master's Guide (page 278):
Whether you will use this rule, and how you will have it apply is something that needs to be considered. Are regular weapons two sizes too big for Tiny creatures? Perhaps only Heavy weapons are two sizes too large?
Tangentially related, the flame blade spell:
This part of the spell's description should likely be addressed in any houserules made regarding how Tiny races can (and cannot) use weapons.
Movement/Combat-related stuff
Moving Around Other Creatures:
This would allow a Tiny creature to move through a hostile Medium sizes creature's space, do note, that this is not new, and has been done through things such as the Halfling's Halfling Nimbleness feature:
Grappling/Shoving:
A Tiny creature would not be able to Grapple or Shove a Medium creature.
Carrying Capacity:
This actually has a significant impact if you're using these rules. Usually the weapons and armor of a creature are not significant in the carry weight rules, or at least, they are not problematic; however, with a Tiny race, if they are using the same weapons as their larger friends then they are taking up twice the carrying capacity they otherwise would be. Thanks to user Ryan C. Thompson for pointing this out!
Squeezing:
A Tiny creature has no reason to ever squeeze because there is no smaller size than Tiny.
Mount Sizes:
A Tiny creature would be able to mount a Small creature, which otherwise cannot be done by an PC race, though it can be done by various familiars and other pre-existing Tiny monsters/NPCs.
Specific Spells
tree stride
dimension door and thunder step:
All of these spells would have different interactions with a Tiny race. They could hide in even smaller trees when using tree stride but they would not be able to bring along most possible allies when using dimension door or thunder step.