I can't speak to the original intent for severely limiting the language dtrace uses (no loops, user defined functions, etc). However, I can say that web assembly itself is designed to be sandboxed so I wouldn't say that is too dangerous at all. It would be quite nice if Microsoft explored a web assembly kernel engine. You see designs like this with ebpf already, they all are trying to do the same - create a statically verifiable language and isolate it's execution. I'd argue using something like web assembly is much better than designing a new language like dtrace does honestly. It's good enough for browsers to run untrusted code, kernel is not terribly different. My WASM kernel driver is however just a POC to vet the idea.
For dlls in the kernel, yes absolutely insecure. It's intended to be a tool run in an analysis VM not on endpoint user systems. The security model is simply different for the DLL based architecture. One of the big reasons I am ok with this design is because driver signature enforcement already must be manually disabled to load the C driver that uses DLLs like this. With DSE off you can already easily load unsigned kernel code so this doesn't open any additional security holes.
it's a dtrace reimplementation because it's using those kernel interfaces. The architecture of the scripting system on top of that could be anything. The wasm rust system mirrors MS' architecture, the C++ DLL system differs intentionally from it.