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Sorry for the late response. That buffering happens on mpv for the way it implements yt-dlp. There is no much to do on mpv (e.g. an argument to improve the buffering). If you want to know a more technical explanation, you will have to ask on MPV's github.
It still isn't perfect though. Scripts like mpv-sponsorblock won't work if you play a video this way.
Unfortunately this won't work with the extension playwithmpv unless you modify the python server to launch a different command. I personally use ff2mpv and I modified the python code of the backend to make this change. If you are interested, this is what I changed on ff2mpv: