Both SquashFS and EROFS are filesystem specifically designed for this kind of embedded, read-only use case. The former is optimized for high data density and compression, and already well established. The later is comparatively new and optimized for high read speed.[3] SquashFS as a rootfs can already be found in many embedded applications using flash storage and is typically also combined with tmpfs and persistent storage mount points or overlay mounts.
For both those filesystems, one would build a rootfs image offline. In the Debian ecosystem, there already exists a tool that can bootstrap a Debian image into SquashFS[4].
[1] https://en.wikipedia.org/wiki/SquashFS
[2] https://en.wikipedia.org/wiki/EROFS
[3] https://www.sigma-star.at/blog/2022/07/squashfs-erofs/
[4] https://manpages.debian.org/testing/mmdebstrap/mmdebstrap.1....