I feel like this whole thing buries the lede a bit.

Yes, turns out running overlay/VPN type things disrupts traffic patterns. This is a non-story.

But we're talking about using wireguard on a local network, so the actual interesting question is: why does it cause the performance to plummet? Is it an implementation issue or something more fundamental?

I expect some performance impact. I don't expect a three orders of magnitude impact (which is what 355 KB/s imputes).