I ran into several issues while trying to get this to work. Here are the steps I had to complete to get it working. Hopefully this will save some hair on your head 😉

The main step is to go into the settings in Docker Desktop -> Resources and make sure that your distribution is enabled for docker.

1. Make sure that you have no docker packages installed on your WSL distribution. Docker Desktop will deploy its own binaries, and any pre-existing binaries will confuse it. This issue exhibited itself for me with errors related to missing files around credentials.
2. Remove any DOCKER_HOST environment variables. Docker Desktop will sort it out. Docker kept hanging for me until I fixed this.
3. If you want to use docker as non-root user, add yourself to the docker group.

Errors / Issues I ran into:

docker.credentials.errors.InitializationError: docker-credential-desktop.exe not installed or not available in PATH – Fixed by 1 above.

docker-compose from WSL2 errors out – Again, fixed by 1

Unable to run docker as non-root user – fixed by 3.

Docker hangs when run as non-root user – fixed by 2.