Given that the document has a section on WSL1 as prior art, they're clearly aware of the problem. It seems that they're mostly assigning the problem to NTFS not having the performance characteristics expected by Linux programs written against ext4, which seems like a solveable problem when working on a green field and can design the filesystem accordingly. Microsoft did not have that luxury.
Do you think they're misdiagnosing the actual problem that WSL1 had?
Yes they are. The Linux API surface is huge. Reimplementing all of it in a compatible way is a colossal amount of work, work that is neverending as Linux evolves.
If they can impose restrictions on applications, e.g. say to Android devs "you can only use this set of syscalls" and use e.g. seccomp to enforce that on Linux-Android, maybe they can get those applications to work. But if they want people to just take any Linux application and run it, they'll have to implement all kinds of crazy stuff. Take rr for example, they'd have to implement ptrace and perf_event_open and other arcane features that you really, really don't want to reimplement.
Today they're probably thinking that with some bounded amount of work they can run "90% of Linux apps" or something like that. But Microsoft thought the same thing about WSL1 and it didn't pan out, hence WSL2. It's strange to me to see Google failing to learn from that mistake.
Do you think they're misdiagnosing the actual problem that WSL1 had?