I have reported the bug to upstream:

Narrow desktop thumbnails are stretched (#205) · Issues · World / Shell 
extensions / Desktop Icons · GitLab
https://gitlab.gnome.org/World/ShellExtensions/desktop-icons/-/issues/205

** Bug watch added: 
gitlab.gnome.org/World/ShellExtensions/desktop-icons/-/issues #205
   https://gitlab.gnome.org/World/ShellExtensions/desktop-icons/-/issues/205

** Also affects: gnome-shell-extension-desktop-icons via
   https://gitlab.gnome.org/World/ShellExtensions/desktop-icons/-/issues/205
   Importance: Unknown
       Status: Unknown

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https://bugs.launchpad.net/bugs/1880031

Title:
  Thumbnail is stretched if its aspect ratio is less than that of the
  container

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