It's called CBL-Mariner: https://github.com/microsoft/CBL-Mariner

disk0 · on April 21, 2021

Coincedentally,

  The system distro is where all of the magic happens. The sytem distro is a containerized Linux environment where the WSLg XServer, Wayland server and Pulse Audio server are running.
  ...
  The system distro is based on the Microsoft CBL-Mariner Linux. This is a minimal Linux environment, just enough to run the various pieces of WSLg. For details on how to build and deploy a private system distro please see our build instructions. [0]

[0]: https://github.com/microsoft/wslg#wslg-system-distro