I may have misunderstood, but I'm using images in Obsidian without any trouble. Create a folder inside Obsidian, right click it, choose "Use as attachment folder" and then drag and drop / paste images into your documents however you like. It saves to this folder and automatically generates the markup when you put an image in.
TIL. Just tested this out with JPG's, PDFs, text files and screenshots..
Given the complexity of setting up WikiMedia properly, I think I'm going to keep using Obsidian.
I mentioned it elsewhere[1], but conveniently VisualEditor should be getting easier to install in an upcoming Mediawiki release (probably 1.35, which is coming next), because of a bunch of parser centralization work. Fingers crossed, but the hassle that you just went through shouldn't be needed soon.
For those of you looking for an update - I gave up - the steps for installing the Extension were long and confusing on Mac, then found out Obsidian can use different folders for inline items. I wish you could preview it within the page, but that's OK.
EDIT: VisualEditor, the de facto standard for pasting things like screenshots into your articles seems to be a pain to install. Got my local env up and running though.. Will report back on success with this extension.