"OR is it possible for siding to dry up and lose moisture once installed and over time"

Absolutely this happens which is why the wood is typically acclimated to the climate it will be installed in prior to installation. For the most part that is not the finish coming off it is the wood grain lifting due to the cut of the wood used. Knotty cedar does that quite often. You may want to see if you can get an inspector from the Wester Red Cedar Lumber Assoc. to have a look. This would most likely be on you if there is a cost involved at last at the start. This is of course assuming you used Western Red Cedar (most common type) and the supplier /mill was a member mill.

Also had you continued answering the questions asked of you previously on your other thread I would have eventually gotten you to this same answer. But realistically the other questions still need to be answered either to us or to an inspector.

Thank you@millworkman. I apologize for not finishing through the thread - I became (and still am) overwhelmed with questions i don't have answer for. It's been tough to get to the bottom of this but appreciate your help. I asked if it was a wood issue (vs stain) bc the builder/supplier believe it's a stain issue (that it just didnt take). As for the wood cut i looked back at invoice and we did Clear Mixed Grain/Shiplap. I really appreciate your knowledge and help w this

Mixed grain would be the a potential cause as that "curling" is what typically would happen. It may be a green product as opposed to kiln dried which would possibly also lead to finish and grain issues as it dried out.

I just heard the supplier telling builder it was kiln dried. They are solving our issue by resanding/restaining. this solution was decided upon as a way to keep the warranty. Have u heard anything about Eco Chemical? I inquired about the brand of stain that was used, whether it was oil based or water based...haven't heard yet but was curious to know if you've heard of Eco Chemical given you're an industry expert or so it seems :)

Never heard of it, it may be a machine applied coating however. I will poke around and see what I may come up with. I do not think it is the finishes faulty however. As I said that big piece is peeling grain not finish.

I agree with you - I don’t think it’s the stain that’s the problem here. I’ve been trying to express that to our builder. Is siding sprayed w stain? Or brushed on? I didn’t even realize there was something like a machine applied coating. Does it matter how the stain was applied? I don’t know how ours was applied but again, another question I will ask.
Sorry I couldn’t understand / ru saying you don’t think the finish is faulty? “Finish”= stain or sanding part? Or both ?

Prefinished from a vendor is "typically" machine coated. If the lumber yard did it, who knows how they applied it. Also as I mentioned in my post on your other thread, some manufacturers require there to be a field applied topcoat to get the full warranty. But again that is not the finish, it is the flat grain lifting. Just my .02.

@millworkman .Its been weeks and the builder has been asking for the specs of the stain that was used on our house from the supplier (water vs oil based, sanding grit info, formula, brand, etc). He said the supplier does not have that info and unfort, we'll never get it. All they know is it's from a factory so likely cheap questionable material. They are doing a test wall on our house now and said they are going to use this product: Sherwin Willimans Woodscaps Stain. They are about to apply it in the next week after they puton a heavy wire brush, sand (80 grit) and stain. Do you know anything about this stain??

https://www.sherwin-williams.com/homeowners/products/woodscapes-exterior-polyurethane-semitransparent-house-stain?itemCatentryId=19104

Do you know anything about this stain??

The stain isn't the problem. It's the wood. That's a water based stain. Maybe you need that where you live. Lots of stained wood siding where I live and everyone uses oil based products.

Have u heard anything about Eco Chemical?

Google Eco Chemical -- it's the first link that comes up.

after they puton a heavy wire brush, sand (80 grit)

I've had boards that exhibited the same characteristics, and I could never get them smooth with the surface remaining level. I had to create dips in the wood to get down below the defects. They needed replacement, not a bit of sanding.

To do the best job, the boards would need to come off the wall and then run through a sander to clean them up. Bad boards replaced. Stained front and back, then reinstalled.

Is the entire house in the same material?

One note of caution --- our house was stained the wrong color (actually, right color but two coats, so it looks much different than we planned.) One obvious solution was to sand it down and restain. My concern, and the reason we're living with it as is, is that they would be sanding off the coating on the galvanized nails and I worried about them rusting in the future.