Yes, the WD2797 would support 500Kb data rates. I still have my old controller board (just found it), It was setup for 4 drives on the standard 34-pin cable config. I added logic to select single or double density and the clock rates as well. As noted it had an integrated data separator and required a few external parts to function. The 1.44MB format was 18 sectors per track of 512 bytes each, doubled-sided with 80 tracks. The sector interleave defaulted to 1, i.e., sector IDs were sequential from the index pulse as 1,2,3,4,5,6---,17,18. As my controller was built to connect to the Vic-20, I used the SO pin (set overflow input on the 6502) for data transfers so the 1.0227MHz CPU could keep up. This required some small modifications on the expansion connector. I also had a an additional expansion card that contained a 6551 async port, 8KB of RAM or ROM at the cartridge address, 1KB of SRAM at one of the empty I/O ranges, a battery backed RTC and I/O decode. The floppy controller plugged into one of the two expansion slots on this board. I used the 1KB of SRAM for sector buffers.
The FM/MFM encoding was created by IBM earlier for the 3740 format (FM) on an 8-inch floppy and MFM later with the 34 format also on 8-inch drives. I later had an IBM 72MD (magazine drive from a System/38). This held two 10-diskette magazines and 3-single diskettes. It also spun the diskettes at double speed, 720 RPM vs 360 RPM. Unfortunately. I never got around to hooking it up... it was a massive assembly and extremely robust, albeit the "picker assembly" did give us problems from time to time.
Commodore also used a bare mechanics drive and GCR encoding with the 1541 drive. They also opted to nix the track 0 sensor. This was a dumb idea... as a drive reset would start with 40 seeks to track zero... resulting in hammering the stepper motor most of the time. It would eventually fail as the magnetic rotor was pressed onto a steel shaft that was knurled. The magnet donut was a cheaper and softer material and would give out over time from the constant hammering. I wound up doing repairs on dozens of these drives where I would remove the cover on the stepper, zip a groove into the magnet donut and epoxy the donut to the shaft. Once realigned, they didn't fail again.
While the GCR and custom electronics worked for Commodore and Apple, even Commodore eventually went with a more industry standard approach with the 1581. This was a superior drive to the 1541. Much higher capacity, better reliability and even faster transfer rates over the serial bus with older machines like the Vic-20 and C64. I still have a couple 1541 drives and a couple 1581 drives. I'm still tempted to interface them to my little 65C02 board setup.... just need the time
Why use a floppy these days?? Well, retro data storage for a retro processor based machine perhaps. Personally I have over a thousand 3.5-inch floppies, and probably a few hundred 5.25-inch floppies. I might even be able to find some old 8-inch ones as well. It's a well sorted and reliable technology that is simple to interface. Having 1.44MB of 6502 code/data that slips inside your pocket is still kinda cool