Hiding WordPress REST API v2 endpoints from public viewing

Is this meant to be used on sites in production?

Yes. Many sites have been already using it.

Is there a security risk to allowing endpoints to be viewed by anyone, such as /wp-json/wp/v2/users/ which shows all users registered to the site?

No. Server responses have nothing to do with security, nothing you can do against a blank screen or read only response.

However, If your sites allow weak passwords, there're some problems. But it's your site's policy, REST API knows nothing about that.

Is it possible to allow only authorized users to access an endpoint?

Yes. You can do it by using permission callback.

For example:

if ( 'edit' === $request['context'] && ! current_user_can( 'list_users' ) ) {
    return new WP_Error( 'rest_forbidden_context', __( 'Sorry, you cannot view this resource with edit context.' ), array( 'status' => rest_authorization_required_code() ) );
}

How do others usually set up this data to be accessed by external applications without exposing too much information?

This question is hard to answer because we don't know what/when is too much information. But we can strictly follow API references and security cheatsheets to avoid unwanted situation.

Best option is to disable V5 new editor and then disable API json, as explains here.

https://codber.com/2020/05/01/how-to-disable-wordpress-rest-api-to-not-logged-in-user-without-a-plugin/

add_filter( 'rest_api_init', 'rest_only_for_authorized_users', 99 );
function rest_only_for_authorized_users($wp_rest_server)
{
if( !is_user_logged_in() ) 

    wp_die('sorry you are not allowed to access this data','Require Authentication',403);
} } 
function json_authenticate_handler( $user ) {

global $wp_json_basic_auth_error;

$wp_json_basic_auth_error = null;

// Don't authenticate twice
if ( ! empty( $user ) ) {
    return $user;
}

if ( !isset( $_SERVER['PHP_AUTH_USER'] ) ) {
    return $user;
}

$username = $_SERVER['PHP_AUTH_USER'];
$password = $_SERVER['PHP_AUTH_PW'];


remove_filter( 'determine_current_user', 'json_authenticate_handler', 20 );

$user = wp_authenticate( $username, $password );

add_filter( 'determine_current_user', 'json_authenticate_handler', 20 );

if ( is_wp_error( $user ) ) {
    $wp_json_basic_auth_error = $user;
    return null;
}

$wp_json_basic_auth_error = true;

return $user->ID;}add_filter( 'determine_current_user', 'json_authenticate_handler', 20 );

Here is what I have used to block all non-logged in users from using the REST API at all:

add_filter( 'rest_api_init', 'rest_only_for_authorized_users', 99 );
function rest_only_for_authorized_users($wp_rest_server){
    if ( !is_user_logged_in() ) {
        wp_die('sorry you are not allowed to access this data','cheatin eh?',403);
    }
}

Is it possible to allow only authorized users to access an endpoint?

It is possible to add a custom permission callback to your API endpoint which requires authentication to view the content. Unauthorized users will receive an error response "code": "rest_forbidden"

The simplest way to do this is to extend the WP_REST_Posts_Controller. Here's a very simple example of that:

class My_Private_Posts_Controller extends WP_REST_Posts_Controller {

   /**
   * The namespace.
   *
   * @var string
   */
   protected $namespace;

   /**
   * The post type for the current object.
   *
   * @var string
   */
   protected $post_type;

   /**
   * Rest base for the current object.
   *
   * @var string
   */
   protected $rest_base;

  /**
   * Register the routes for the objects of the controller.
   * Nearly the same as WP_REST_Posts_Controller::register_routes(), but with a 
   * custom permission callback.
   */
  public function register_routes() {
    register_rest_route( $this->namespace, '/' . $this->rest_base, array(
        array(
            'methods'             => WP_REST_Server::READABLE,
            'callback'            => array( $this, 'get_items' ),
            'permission_callback' => array( $this, 'get_items_permissions_check' ),
            'args'                => $this->get_collection_params(),
            'show_in_index'       => true,
        ),
        array(
            'methods'             => WP_REST_Server::CREATABLE,
            'callback'            => array( $this, 'create_item' ),
            'permission_callback' => array( $this, 'create_item_permissions_check' ),
            'args'                => $this->get_endpoint_args_for_item_schema( WP_REST_Server::CREATABLE ),
            'show_in_index'       => true,
        ),
        'schema' => array( $this, 'get_public_item_schema' ),
    ) );

    register_rest_route( $this->namespace, '/' . $this->rest_base . '/(?P<id>[\d]+)', array(
        array(
            'methods'             => WP_REST_Server::READABLE,
            'callback'            => array( $this, 'get_item' ),
            'permission_callback' => array( $this, 'get_item_permissions_check' ),
            'args'                => array(
                'context' => $this->get_context_param( array( 'default' => 'view' ) ),
            ),
            'show_in_index'       => true,
        ),
        array(
            'methods'             => WP_REST_Server::EDITABLE,
            'callback'            => array( $this, 'update_item' ),
            'permission_callback' => array( $this, 'update_item_permissions_check' ),
            'args'                => $this->get_endpoint_args_for_item_schema( WP_REST_Server::EDITABLE ),
            'show_in_index'       => true,
        ),
        array(
            'methods'             => WP_REST_Server::DELETABLE,
            'callback'            => array( $this, 'delete_item' ),
            'permission_callback' => array( $this, 'delete_item_permissions_check' ),
            'args'                => array(
                'force' => array(
                    'default'     => true,
                    'description' => __( 'Whether to bypass trash and force deletion.' ),
                ),
            ),
            'show_in_index'       => false,
        ),
        'schema' => array( $this, 'get_public_item_schema' ),
    ) );     
  }

  /**
   * Check if a given request has access to get items
   *
   * @param WP_REST_Request $request Full data about the request.
   * @return WP_Error|bool
   */
  public function get_items_permissions_check( $request ) {
    return current_user_can( 'edit_posts' );
  }

}

You'll notice that the permissions callback function get_items_permissions_check uses current_user_can to determine whether to allow access. Depending on how you're using the API, you may need to learn more about client authentication.

You can then register your custom post type with REST API support by adding the following arguments in register_post_type

  /**
   * Register a book post type, with REST API support
   *
   * Based on example at: http://codex.wordpress.org/Function_Reference/register_post_type
   */
  add_action( 'init', 'my_book_cpt' );
  function my_book_cpt() {
    $labels = array(
        'name'               => _x( 'Books', 'post type general name', 'your-plugin-textdomain' ),
        'singular_name'      => _x( 'Book', 'post type singular name', 'your-plugin-textdomain' ),
        'menu_name'          => _x( 'Books', 'admin menu', 'your-plugin-textdomain' ),
        'name_admin_bar'     => _x( 'Book', 'add new on admin bar', 'your-plugin-textdomain' ),
        'add_new'            => _x( 'Add New', 'book', 'your-plugin-textdomain' ),
        'add_new_item'       => __( 'Add New Book', 'your-plugin-textdomain' ),
        'new_item'           => __( 'New Book', 'your-plugin-textdomain' ),
        'edit_item'          => __( 'Edit Book', 'your-plugin-textdomain' ),
        'view_item'          => __( 'View Book', 'your-plugin-textdomain' ),
        'all_items'          => __( 'All Books', 'your-plugin-textdomain' ),
        'search_items'       => __( 'Search Books', 'your-plugin-textdomain' ),
        'parent_item_colon'  => __( 'Parent Books:', 'your-plugin-textdomain' ),
        'not_found'          => __( 'No books found.', 'your-plugin-textdomain' ),
        'not_found_in_trash' => __( 'No books found in Trash.', 'your-plugin-textdomain' )
    );

    $args = array(
        'labels'             => $labels,
        'description'        => __( 'Description.', 'your-plugin-textdomain' ),
        'public'             => true,
        'publicly_queryable' => true,
        'show_ui'            => true,
        'show_in_menu'       => true,
        'query_var'          => true,
        'rewrite'            => array( 'slug' => 'book' ),
        'capability_type'    => 'post',
        'has_archive'        => true,
        'hierarchical'       => false,
        'menu_position'      => null,
        'show_in_rest'       => true,
        'rest_base'          => 'books-api',
        'rest_controller_class' => 'My_Private_Posts_Controller',
        'supports'           => array( 'title', 'editor', 'author', 'thumbnail', 'excerpt', 'comments' )
    );

    register_post_type( 'book', $args );
}

You'll see rest_controller_class uses My_Private_Posts_Controller instead of the default controller.

I've been finding it difficult to find good examples and explanations for using the REST API outside the documentation. I did find this great explanation of extending the default controller, and here's a very thorough guide to adding endpoints.