I've got an old 3410 that I bought cheap at an auction about 20 years ago with a stuck motor.
I think I gave $80 for it but it was complete and unmolested with a deck and tiller.
I pulled the engine thinking I was going to do a full overhaul.
Around that same time I had bought a 7116H that needed less work so the 3410 became less important.
The cylinder and piston were in similar shape to yours.
I ran a ball hone through the cylinder, made sure any galling was cleaned up, I polished the crank journal with some oil and emery paper, and sanded the rod journal smooth again. I sanded piston skirt smooth, just enough to take down any high spots, cleaned the rings and ring lands real well, and put it back together. I didn't even buy gaskets, I just glued up what I had there with some High Tack spray. I did replace the output crankshaft seals. Its been fine ever since. I used it for 8 years as my main mower in PA, finally bringing it here and using it as my garden tiller and winter snow plow machine til a few year ago when I bought a 3416H that took its place.
I'd measure the bore and the piston and see if it had enough clearance to begin with. That sort of damage is from lack of lube, or overheated parts that expanded to the point they began to seize. The rod being in wrong will certainly do it.
On mine, the rod was fine, the last owner just ran it out of oil. It likely hadn't had an oil change in decades before I got it.
Those motors are tough as nails and can survive all sorts of issues. I had a 16hp in a 7016 that had a rattle for years, I plowed my 1/4 acre garden with it for years, I figured that one day it would just go bang and quit but it kept running, I finally sold it with the property 12 years ago. The new owner dumped it after one season of mowing grass. I saw it listed on CL there a few years ago with no motor in it. I emailed him and he told me it was worn out and making noise. I told him it sounded like that for the 10 years or more that I had it.
It ran with a rather substantial rattle or knock for years. The guy I bought it from said it overheated due to grass build up in the motor fins one super hot day and it made noise ever since. He said he dumped it after he heard the engine noise.
The guy he sold it to replaced the carb, drive discs, points, and starter then listed it for free on CL. It ran so perfect when I got it despite the knock I just kept running it. The rest of the tractor was rough so I wasn't too concerned about it. I didn't expect it to last, but it did just fine without spending anything on it. Guys would here it and cringe thinking it was about to blow up, but it just kept going. To me, it sounded like wrist pin noise or a sloppy piston skirt clearance but it didn't use any oil and it made good power. .