I don't see how this distinction without a difference places Israel in a category all its own. That's the thesis of the UN's 1975 Zionism is racism resolution, that Israel is uniquely ethnostatist.

This may be a case for Yogi Berra: "in theory there's no difference between theory and practice. But in practice there is."

Since citizenship in Israel can be acquired through conversion to Judaism, Israeli citizenship is actually less determined by descent than many European ethnostates whose citizenship laws are clearly ethnostatist. That the ethnostatism is not explicitly stated in their constitutions or declarations of statehood, but embedded in citizenship laws is why I see a distinction without a difference.

If Israel should be excluded from the club of liberal democracies, then so should Japan. LDP-governed Japan denies full citizenship to Japan-born ethnic Koreans fluent in Japanese, who speak no Korean and whose great-grandparents came to Japan after the Japanese conquest. Italy grants citizenship to anyone with Italian great-great-grandparents, even if they speak no Italian (https://www.cntraveler.com/story/countries-where-you-can-get-a-passport-through-ancestry)

Should we not eject Denmark from the liberal democracy club after recent changes to its citizenship law:

"The most controversial change is related to the process by which citizenship is granted. Pre-approved applications for Danish citizenships must be passed by a parliamentary majority vote. Previously, applicants were listed alphabetically in bulk twice a year. But now applicants will be organized by their nationality. Critics say that categorizing applicants in this way makes it easy for parliament or individual parties to reject pre-approved citizenship applicants based purely on their country of origin." (https://www.forbes.com/sites/davidnikel/2021/04/26/scandinavian-countries-tighten-requirements-for-new-citizens/?sh=659a348f51fa)

The front of the Bundestag says "Dem Deutschen Volk"--and we know what Volk means auf Deutsch. Germany still defines citizenship partially by blood, as any German-born ethnic Turkish native speaker of German and little or no Turkish will tell you:

"Eligibility for citizenship through ethnic German background has since been limited to individuals born before 1993, effectively ending future resettlement. More substantial changes were adopted in 1999, when birthright citizenship was introduced for children born since 1 January 2000 to noncitizen immigrants who had resided in Germany for at least eight years. Any such children who held another nationality at birth were required to choose between their German and foreign nationalities on reaching the age of 18. As a transitional arrangement, children born between 1990 and 1999 to applicable parents could also acquire citizenship by special registration, provided that their parents had registered them by the end of 2000. Until this change, German nationality had been transmitted to subsequent generations only by descent rather than by birth within Germany..."

It's inconsistent to disqualify Israel as a democracy, and not Germany and all of Eastern Europe simply because it declares its ethnostatist purpose in a different document. Israel's declaration of statehood also committed the state to:

"ensure complete equality of social and political rights to all its inhabitants irrespective of religion, race or sex; it will guarantee freedom of religion, conscience, language, education and culture..."

...However faulty the observance due to endless war with openly genocidal enemies sworn to its destruction. This last point is why I refer to geography to justify cutting Israel more slack than ethnostatist Europeans living in a more sheltered neighborhood.

Your use of the term nation-state is telling. In Latvia until 2000, passports listed citizenship and nationality separately, a holdover from Soviet times. Latvia was not unique in this regard. In 2000 the obligatory listing of "nationality" was made voluntary. Through his law firm my brother worked with Latvia's foreign minister Valdis Birkavs in the early 90s and told me how he struggled to explain why Jews would find obligatory listing of their nationality on their passports as "Jewish" offensive and threatening and how Americans in general would find the separation of nationality from citizenship bizarre.

Would you still place Israel in an ethnostatist category of its own while not doing the same to 1990s Latvia, or the Latvia of 2014 that voted against adopting Russian as an official language? If so, you're defining ethnostate and liberal democracy inconsistently while demanding that Israel be better than its many ethnostatist peers in Europe and outside, only a few of whom I've cited here.