Your second post is basically correct, Ec.
From a mechanical perspective, Defense (like Resilience) directly reduces the portion of the hit table allocated to crits. Crits are actually higher priority than crushing blows because they do more damage, so even if you somehow pushed your avoidance to 102.4% with zero Defense rating or Resilience, you'd still have a 5.6% chance to take a crit.
Now, if you could get your avoidance to 108%, you'd be crit and crush immune since every attack would be a miss, parry, dodge, or block. However, the downside of this is that if you take a stun, incapacitate, or other disabling effect, get attacked from behind, or cast a spell with a casting or channeling time, you'd immediately be crittable as well as crushable since you'd no longer be able to dodge, parry, or block.
Defense is passive in the sense that it always operates, while avoidance requires that you be able to actively defend yourself.
The order of priority on the hit table is: miss, dodge, parry, block, crit, crush, hit. If the total of these values exceeds 100%, they start getting pushed off the table from right to left. Defense and Resilience work by eliminating the base chance of a crit, while avoidance works by increasing miss/dodge/parry/block to the point where there's no room left for other results.
In 3.0, it will no longer be possible to take a crushing blow from a mob 3 or fewer levels higher than you if your Defense skill is at least maxed for your level (350+ for level 70). Thus, any attack that would have been a crushing blow in the old system will instead occupy just the normal hit portion of the table. Due to the increase in block value, you'll still see significant additional mitigation from pushing your avoidance, however. And as you noted, it's still necessary to cap Defense in order to avoid critical hits.