It is more like creating a Linux kernel deigned to run only WINE.

A more apt comparison would be using the Windows guest to remote into the Linux host via xorg piping, waypipe, VNC, RDP, etcetera, which conveys your feeling of weirdness while being a closer approximation of what this really does.

Yes. It has basically the same issue that any compatibility layer is going to have. It will either faithfully reproduce X11 so well it will bring all of the nonsense Wayland was meant to do a way with (everything not directly related to displaying graphics, like font and geometry rendering from the '80s, network transparency, insecure event handling) OR it will attempt to get a reasonable subset working for modern X apps and it won't be compatible with dusty old binaries and X forwarding etc.

Right now it looks like a shim for Xwayland so it's the first one, but as it matures we'll see.