Waydroid disables most of the Android privacy and security model through not having functional SELinux. SELinux is not simply an additional layer of security on Android but rather deeply integrated into the OS. The app sandbox and isolation throughout the OS are heavily built on SELinux. It also heavily depends on it for kernel attack surface reduction combined with internal kernel hardening via exploit protections.

Waydroid uses an outdated fork of LineageOS running with namespaces and a compatibility layer on top of a much less private and secure base OS without similar kernel or userspace security protections. Running up-to-date AOSP in a virtual machine would at least be able to preserve the internal Android privacy and security model for apps to protect apps from each other and the OS from apps. It would also contain the overall OS within it too. Using the much less private and secure OS as the host OS with full access is quite backwards from a privacy and security perspective but would be a huge improvement.

AOSP is much more private and secure than traditional desktop Linux distributions. Moving to that software stack is inherently going to be moving much further away from competing with the privacy and security of iOS. The direction taken by GrapheneOS is to start from AOSP and greatly improve the privacy and security it provides to compete with and exceed the industry standard privacy and security provided by iPhones. That requires more than only software. Hardware and firmware security are very important too. Software security also increasingly depends on hardware-based security features such as hardware memory tagging, hardware control flow integrity protections, hardware-based virtualization and much more.

Keeping user data safe from access via encryption also depends on hardware security features for the vast majority of users not using a very strong passphrase. People take it for granted that they're going to have secure data via disk encryption with a random 6 digit PIN but that's not the case without a good secure element and OS integration with it. The approach used by desktop operating systems with TPMs is awful and makes security worse in a lot of ways rather than better. It's not at all the same thing, similarly to how what the desktop world calls secure boot is not a serious or complete implementation of it and doesn't provide nearly any useful security properties to end users unlike iOS or AOSP.