This I found out to be an sshd problem. Somehow the systemd service cros-sftp of the container was not working.
All the below steps are from crosh terminal.
From crosh terminal (Alt+Ctrl+T):
vmc start termina
Wait for sometime till the green color prompt comes. Then to list your containers, type lxc list. In most cases it is only one container named "penguin", so you can issue the below command:
lxc start penguin
Finally login to the root shell of the container:
lxc exec penguin -- /bin/bash
Sources:
https://superuser.com/questions/1617731/how-to-fix-the-terminal-and-linux-files-for-error-20-on-a-chromebook
https://www.reddit.com/r/Crostini/comments/cij85h/how_to_login_to_container_from_crosh/
Login to root without password: https://www.reddit.com/r/Crostini/comments/e8749l/what_is_the_default_password_for_the_initial/
Extensive material: http://pauldone.blogspot.com/2019/12/my-notes-chromeos-crostini.html
Most problems can be found out by reading the journal, type this to check it journalctl -xe | more. Alternately from crosh as well we can check the problems from the file home/chronos/user/log/chrome or var/log/messages
Source: https://www.reddit.com/r/Crostini/comments/m0r9dg/quick_tip_more_info_on_crostini_error_codes_is/
In our case it is known to be a problem of the cros-sftp service which is probably dependent on the sshd service.
Check the service:
systemctl status cros-sftp
If the service is disabled, enable it.
systemctl enable cros-sftp
Start the service
systemctl start cros-sftp
Edit the below file:
vim /etc/systemd/system.conf
Press i to enter into edit mode. Then you can move around the file and edit it. It is recommended to watch any tutorial on how to use Vim editor, if you do not know.
Uncomment the line (remove the starting #): DefaultStartLimitBurst. Set the value to a large number like 50.
DefaultStartLimitBurst=50
Save it (Press Esc on keyboard, followed by shift+z 2 times). Then restart the systemd daemon.
systemctl daemon-reload
Again try starting the cros-sftp service
systemctl start cros-sftp
Sources:
https://www.reddit.com/r/Crostini/comments/8p351n/linux_files_mount_error_anyone_else_having/
https://serverfault.com/questions/845471/service-start-request-repeated-too-quickly-refusing-to-start-limit
Try to start the mentioned service manually:
/usr/sbin/sshd -t -f /dev/.ssh/sshd_config
If it fails with the error Privilege separation user sshd does not exist we need to create the sshd user.
vim /etc/passwd
Add the line: sshd:x:74:74:Privilege-separated SSH:/var/empty/sshd:/sbin/nologin then save and exit.
vim /etc/group
Add the line: sshd:x:74: then save and exit.
Now try starting the service, it should not complain anymore.
/usr/sbin/sshd -t -f /dev/.ssh/sshd_config
Also check the cros-sftp service, it should be green.
systemctl status cros-sftp
Press Ctrl+D to logout of the container root shell.
In the green prompt type:
lxc stop penguin
Press Ctrl+D again to logout to yellow crosh shell. Type:
vmc stop termina
After this the terminal can be closed. Now open the Terminal app from chrome os launcher and all should work fine.
Tiny error towards end you have
systemctl status cros.sftpand should be
systemctl status cros-sftp