How is this something relied on for building images?  As it stands, such
a boot entry is non functional since it doesn't tell grub to set up a
loop mapping to the underlying file so the "disk" won't be found.  If
you are building an image and later transferring that image to bare
metal, then it would work ( who does this? ), but does that use case
only need to get the running system set up, or does it also need to be
able to have os-prober add entries for other installations too?

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https://bugs.launchpad.net/bugs/1788775

Title:
  updating grub can end up with loopback devices in grub.cfg

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