Why the Gnome Dance Reads as Funny
It is not the dancing that is funny. It is that the dancing should not be happening here.
The awkward-motion gap
A normal person in that scene would stand still or, at most, fidget. The clip plays a character dancing confidently in the exact middle of a moment where confidence is the wrong thing. That gap between what the body is doing and what the situation calls for is the whole joke. The cringing comes from your brain screaming that something is off before you can name it.
Why the mumbled song seals it
The original audio is deliberately slurred and unhinged - a voice that has clearly not had a decent night. Pair that with a calm, polite room and the mismatch doubles: the body is wrong, the sound is wrong, and the two are wrong together. Remove the song and it is just a weird dance. With it, it is the melatonin dream everyone is copying.
Why people keep swapping the center
Once the stage and the audio are fixed, the only free piece is whoever is dancing. That is why the format traveled: anyone can drop their own character into the slot and argue about who fits worst. The Rumpelstiltskin Dance Remix keeps the fixed stage, gives you a character library, and lets you score the swap against a cringe moment of your choice.