Ah the screenshot is meant to illustrate that my xterm spawned in the middle of the huge X screen.

This looks like a bug in Xwayland. Xwayland uses the full resolution reported as mode in wl_output events but ignores the devices scale factor.

https://cgit.freedesktop.org/xorg/xserver/tree/hw/xwayland/xwayland.c#n607 should probably be updated to take the value from https://cgit.freedesktop.org/xorg/xserver/tree/hw/xwayland/xwayland-output.c#n241 into account.

However, it might be more useful just be able to specify the resolution and scale factor directly when starting Xwayland in non-rootless mode.

Would also be nice to have it use the aura-shell protocol for chrome side decorations.

Actually, using Xwayland directly is not a good idea. It only works well in rootless mode. You want to use something like:

weston --backend=wayland-backend.so

have have a weston.ini file with:
[core]
modules=xwayland.so