Ok so it's not the uinput permissions.

When you use lightdm, do you use it to log into a Gnome wayland session, same as with GDM? Or is there any other difference between using GDM and LightDM? What exactly is/isn't working, and how can you tell it is related to the XTEST extension?

Also I can use the PS5 controller as a mouse just fine.

Ok, this could maybe be the kernel driver creating a "real" touchpad device. Steam is able to create fake/virtual mouse and keyboard devices, I suspect that's what steam uses XTEST and/or uinput for. So even though your PS5 touchpad works, that does not invalidate my theory that steam wants XTEST for mouse/keyboard input fakery, because that's what exactly what XTEST is for.

So technically, Steam wouldn't require XTEST for controller input, it would require XTEST to map controller inputs to fake mouse or keyboard inputs. I don't know what exactly steam does if XTEST isn't present, like what exactly doesn't work?

And XTEST is an X11 protocol extension, it probably doesn't work properly under Wayland anyway.

The null here is concerning to me.

Dunno, '(null)' might just refer to the default connection (or server or screen or whatever X11 object this refers to), so not sure if this something to be concerned about. I presume X11 clients in general do work? Like xterm or xeyes work, right?

I am having the same bug as in here :/

The fact that you cannot log in may seem/look like that exact issue you linked to, but that's from 2019 and may have a different cause. In general, GDM will start some executable, (i.e. gnome-session or something like that, or at least it used to be gnome-session, haven't used gnome in a while) which if it exits/crashes this will kick you back to GDM. It could crash for many reasons.

You should check the logs for sure for both issues. X11 session logs (relating to Gnome X11 not starting), should be in ~/.xsession-errors (or ~/.xsession-errors.old for the previous session, I think). There may be a /var/log/Xorg.0.log for xorg, which I guess could also be the thing crashing (maybe). There may be other things logged with journald that could be relevant. journalctl --user should show all the logs for the user session. Logs from Gnome, since it runs as your user, would presumably show up there. My guess is all the relevant logs for a Gnome wayland session would also be there, as well as (hopefully) Xwayland errors/warnings, since Xwayland is actually the thing that would report it doesn't support XTEST.

Note that journalctl likes to show the oldest logs first, so look at the timestamps. You can press G to scroll to the end. There are various ways to filter messages, look at journalctl --help. You might want to use --grep to look for anything related to XTEST or xwayland.

Lightdm and GDM are systemd units (systemctl list-units), the logs would show with something like sudo journalctl -u lightdm.