I am interested in constructing an all wood canoe but want to understand some of the pros and cons of just using varnish rather than fiberglassing over the wood.
There are many construction methods for building a traditional all-wood-canoe; lapstrake, feather-lap, wide-board rib & batten, wide-board flush batten, wide-board metallic joint, cedar-strip, cedar-rib, etc. The mentioned construction methods were traditionally varnished or painted, but will not work well or at all with a fiberglass covering.
However, with the development of epoxy resin glues a variation of strip-building has became popular. This method has no rib frame work but instead relies on a sheet of fiberglass cloth set in epoxy resin on both the interior and exterior side of the wood-strip core material, to give the watercraft the necessary structure and strength. I assume this is the method you are thinking of. If you remove the fiberglass you have to add a rib frame work for structure and strength.