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Gentoo is literally designed for this but people keep coming up with other non-solutions. A Gentoo stage 3 with a custom kernel can run on a potato.

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Doesn't Yocto come from Gentoo to some extent?

Bitbake (Yocto's build system) started originally as a fork of portage (gentoo package manager), but they have diverged a ton. Very similar concepts though.

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