Alright, at least partially understanding things now. So it looks like
"Decoding failed" happens generally on some platforms (and I do not
understand still why this is). The difference between the generic kernel
and the kvm kernel is that the kvm kernel has a built-in BLK_DEV_RAM of
size (4096) whereas the generic kernel uses a module for that.

It looks like only if BLK_DEV_RAM=y is set, the code which populates the
initial rootfs does try to flush and refill the ramdisk device.
Otherwise the partially expanded rootfs is retained. And I guess the
ramdisk size is set to small so we get the incomplete write there.

I guess the solution (which does not solve the decode failure) is to
change the kvm kernel config to

BLK_DEV_RAM=m
CONFIG_BLK_DEV_RAM_SIZE=65536

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https://bugs.launchpad.net/bugs/1873809

Title:
  Make linux-kvm bootable in LXD VMs

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