README says

Extract exe file and rootfs.tar.gz from zip file and overwrite your existing ones.

does it mean to simply overwrite these two files of an installed directory

.
|- Arch.exe           (overwrite)
|- ext4.vhdx  (WSL 2)
|- rootfs/    (WSL 1)
|- rootfs.tar.gz      (overwrite)
...

and leaving the rest of the work to the executable? Would I lost my data in /home/ and /etc/.

If someone did not read carefully and misunderstood the words, he might try to extract rootfs.tar.gz into the Linux root by running tar -xf rootfs.tar.gz \, or even worse, into rootfs/ on Windows. 🤔