Comment 78 for bug 1835660

I think "file" is wrong. (I have the same kind of misleading output : "ASCII cpio archive ..." )

You can try to you use "unmkinitramfs" on your inird.img (unfortunately "cpio" does not work to fully "unarchive" this kind of "multi-segments" archive) and check the size.
I have "lz4" initrd.img files around 80MB. If I uncompress/unarchive them with "unmkinitramfs", I get around 260MB of files and folders.
If I remake initrd with COMPRESS=gzip in /etc/initramfs-tools/initramfs.conf I get initrd files a bit smaller (around 74 MB)

So I think update-initramfs (and the invoked script mkinitramfs) are doing their job.
The "initramfs unpacking failed: Decoding failed" error might just be a cosmetic error from grub or kernel.