In my opinion Ethanol isn't the problem but it magnifies the other problems that already existed.
One example of this is carbs on Honda engines. Everyone blames ethanol for the issues but there are numerous cases where there are the same issues without ethanol.
I have this Stack On one from TSC. https://www.tractorsupply.com/tsc/product/stack-on-18-gun-welded-steel-security-cabinet-with-beveled-edge-hammer-granite-2398296
Only issue with it is guns with scopes take up a lot of room. I have outgrown it also.
I doubt that is where it is leaking from because you would have issues with it running if that was the case. It could be coming from the fuel lines or primer or carb.
The crank case on a 2 stroke has to be sealed for it to work. When it is not running there is nothing but a minimal amount...
Helicoil. That would be a very easy one to do. Kits aren't that expensive on Amazon.
On second look it looks like it has been helicoiled already but now I see what you are talking about. You could jb weld it but I would just leave it alone.
Base gasket or cylinder gasket should get you in the neighborhood. What makes you say it is leaking? 2 strokes will run erratic if there is an air leak and eventually burn up.
Used motor oil contains Benzene that has a very low toxicity level. 1ppm is the twa or action level or whatever OSHA calls it (I should know it considering I just had training about it). Unless you just drained 20 gallons out of a bunch of crummy running vehicles I doubt it is that. Could be...
The first picture makes it look like the piston is sloppy in the cylinder. If the piston can move around a lot in the cylinder that is where your smoke is coming from because the rings are worn out also.
Run it till it dies. I wouldn't put much money into it.
Working on an old Snapper rear engine rider. The old flat head Briggs like to loose the threads in the top shroud bosses so figured I would need these.
I don't have a dueling tree but I have several of the spinning targets. They are fun also. I like the ones with a small top and big bottom. I used to be able to keep them spinning but haven't been able to for a while. Every now and then you turn them around and start pounding the steel back...