Booting a squashed filesystem from ISO

Question

I am trying to create a UEFI bootable CD ISO with a squashed filesystem from a virtual machine, which I provisioned with the stuff I need.

To explain:

1. I use packer and a kickstart file to install CentOS 7
2. I use a packer provision script to compile some binary stuff that I need on the image
3. I followed the instructions from here to create a squashed filesystem image after everything I need is in the OS:

mkdir -p /mnt/squashfs /squashfs
mount -o bind / /mnt/squashfs

mksquashfs /mnt/squashfs /squashfs/filesystem.squashfs -comp gzip -no-exports -xattrs -noappend -no-recovery -e /mnt/squashfs/squashfs/filesystem.squashfs
find /boot -name 'vmlinuz-*' -type f -exec cp {} /squashfs/vmlinuz \;
find /boot -name 'init*' -type f -exec cp {} /squashfs/initrd.img \;

4. After that I took some scripts from here to build an ISO:

yum -y install xorriso dosfstools grub2-efi-modules mtools

mkdir -p /iso /iso_src/ /iso_src/live
find /boot -name 'vmlinuz-*' -type f -exec cp {} /iso_src/vmlinuz \;
find /boot -name 'init*' -type f -exec cp {} /iso_src/initrd.img \;
cp /squashfs/filesystem.squashfs /iso_src/live/
touch /iso_src/LINUX_CUSTOM

cat <<'EOF' >grub.cfg

search --set=root --file /LINUX_CUSTOM

insmod all_video

set default="0"
set timeout=30

menuentry "Custom Linux" {
    linux /vmlinuz boot=live toram=filesystem.squashfs quiet nomodeset
    initrd /initrd.img
}
EOF

grub2-mkstandalone \
    --format=x86_64-efi \
    --output=bootx64.efi \
    --locales="" \
    --fonts="" \
    "boot/grub/grub.cfg=grub.cfg"

 (dd if=/dev/zero of=efiboot.img bs=1M count=10 && \
    mkfs.vfat efiboot.img && \
    mmd -i efiboot.img efi efi/boot && \
    mcopy -i efiboot.img ./bootx64.efi ::efi/boot/
)

xorriso \
    -as mkisofs \
    -iso-level 3 \
    -full-iso9660-filenames \
    -volid "LINUX_CUSTOM" \
    -eltorito-alt-boot \
        -e EFI/efiboot.img \
        -no-emul-boot \
    -append_partition 2 0xef efiboot.img \
    -output "/iso/image.iso" \
    -graft-points \
        "/iso_src" \
        /EFI/efiboot.img=efiboot.img

Now I am trying to boot that ISO in VirtualBox with UEFI enabled, but it fails with

Failed to switch root: Specified switch root path '/sysroot' does not seem to be an OS tree

So as far as I understand my squashfs has not been mounted? I am kind of new to this, so I have a partial understanding of all of the steps, and it feels like I am missing something, since the only thing that tells grub that instead of the machine from which I made the image from (where there was an actual block device) now I need my filesystem to come from a squashfs file is the toram thing.

Can anyone provide pointers/examples on how to solve this an make this system boot? I read a lot about dracut but could not understand how to use it in this scenario? Or is this simply a grub configuration file issue?

Update

After some Googling, I switched to dracut, now in my provision script i use dracut to generate initrd like this:

dracut -a dmsquash-live -N -m "kernel-modules base" --filesystems "squashfs" /dracut/initrd.dracut.img

and use the following grub boot entry (the initrd.img here is the initrd.dracut.img created previously):

menuentry "Custom Linux" {
    linux /vmlinuz root=live:/dev/sr0 rd.live.debug=1
    initrd /initrd.img
}

this seems to get futher but fails with Warning: /dev/mapper/live-rw does not exist

Update 2

It seems that CentOS 7 comes with an older dracut that only supports the Live CD mode (see The filesystem structure is traditionally expected to be: under Booting live images, which my structure did not conform to). So I started over with CentOS 8, a newer dracut, which can handle the structure I have and now my only issue when booting is having the /etc/fstab from the original machine, which I hope Google will help me solve:D

Update 3

Simply ignoring /etc/fstab along /dev and /proc` when making the squashfs did the trick - the final ISO successfully boots in UEFI mode.