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Wait, are extensions still running locally?
Part of them
How does this handle things like syntax differences across different versions?

For "unstable" languages like Rust and c++ for example?

I think that can be gracefully solved by the language server. The client is local, the server is remote and each remote has the server corresponding to the correct version.
"ui" extensions run locally while "workspace" extensions are remote.
Interesting is the licensing. The VS Code Server inside of the container is not MIT licensed. They claim to stay free of charge but want to add premium features later (whatever that is).
So for beginners, you will still need a Remote Machine or Container for your development?

This could potentially fix the problem with Ruby Rails on Windows. But we now need to figure out the remote "part".

I don't understand, why isn't there more excitement about this.

This is huge in my opinion.

Now you can get any environment in container on your local machine, with working Intellisense and all the IDE integrations.

I agree. I submitted the story because it's a huge feature that's going to make me much more productive. There are many hacks for vs code already to do something similar, but this is truly unique. What's odd, is I've seen other topics related to vscode for small features that have gotten a lot more feedback.