Dynel has many good properties, and is a great choice for an updated version of the painted canvas decks on wooden boats. I have used it in the past and found it easy to work with, though with clearly different properties than light fiberglass. I didn't have any trouble getting the material to easily conform to the corners and curves on this boat. One does have to be careful about "floating" the material too much in the epoxy, but that goes for any sheathing operation. I didn't dilute the epoxy and am not quite sure why one would.
In this case, the Dynel was actually replacing an old painted canvas deck surface, and the texture (as well as protection) was what was desired. Here, I simply draped the dry material over the prepared surface and wet it out from the top. Later, I trimmed the excess during the "green" stage of cure.
For fully encapsulating a deck, I am not sure if it's the right choice or not, but not because of anything bad about the Dynel. Still, I assume you wouldn't want the Dynel texture on all parts of the deck. Also, if you want to fair over the material and sand things smooth before proceeding to different steps, be aware that Dynel will fuzz up when ground, unlike fiberglass that becomes a hard and easily-sandable medium.
That said, you can still fair and sand it, but if you're not going for the wooden boat-like texture that Dynel provides, I don't necessarily see it as being a better choice than E-glass. That doesn't mean it's a worse choice either.
I honestly have no idea which material is better suited to this sort of encapsulation, assuming that the texture of the Dynel isn't a desirable part of the equation. My inclination is to lean towards E-glass as being stronger, but I have no science to back this up.
So far, the results of "sealing" Dasein's badly crazed gelcoat with the epoxy and 10 oz. cloth seems to have been a good success. The cloth print-through problem could probably be avoided by filling the weave of the cloth with additional coats of raw epoxy before fairing, but as it is it is only noticeable under certain lighting conditions. It seems to me to be a decent manner of addressing this difficult problem. That doesn't mean it was easy or quick. But there are rarely easy or quick solutions to these old boat problems.
I am not sure that even grinding away all the gelcoat, when the problem is as bad as that on Dasein or Jetstream, would be sufficient on its own, as most of the time these sorts of cracks actually extend into the skin coat beneath as well; these cracks are diabolical and challenging to completely eliminate. This is what led to the decision to try the encapsulation on Dasein. I would have no qualms using, or recommending, this process on another boat.
If your gelcoat, Bruce, is unsound and loose, grinding it away before proceeding with the encapsulation is probably necessary if you want to take all steps to ensure that the crazing doesn't print through and to ensure good adhesion of the sheathing.