At a glance, I'd say that engine was run low on coolant and overheated . . or abused with ether starting in cold weather. I've had to rebuild many Deere 300 series engines that looked exactly like that. When an engine gets overheated, the piston-skirts are the first thing to suffer. High heat causes the skirts to swell, and the oil on the cylinder wall to exceed its "flash point." When an engine gets overloaded with ether, pistons with conventional square-sided rings tend to break on top. Pistons with Keystone triangle-shaped rings tend to gaul the skirts.
As to a machine shop suggesting a "10/10." I'd run away and go elsewhere - unless your crank journals are actually damaged. Grinding a crank undersize just makes it a little weaker and it's a shame to do it unless absolutely necessary. Even when slightly worn, polishing the journals an and installing .001" undersize bearings is often all that is needed.
I think, you are "overthinking." That engine is rugged and fairly simple. When piston skirts get damaged like that, they knock. Nothing complicated and nothing uncommon.
By the way, a stuck wrist-pin is near impossible, because in your engine, they are "free floating." They move in the rod bushing and in the piston bore.
I'd put in new sleeve and pistons. Hand polish the crank journals, install standard bearings and check clearance with Plastigauge. Easy to do.
One thing that ought to done though, is . . . get the big-end (bottom) of the rods checked. Many shops over-look that. Deere rods tend to get slighly out-of-round after a few in-frame rebuilds. The big ends that hold the shell bearings need to be "resized" once in awhile. In our Deere shop, it was standard procedure for any diesel rebuild. If a little out. the rod cap is shaved, and the hole rebored to original specs. It can only be done once or twice, and then the rods get too short.
I also advise you check your balancing shafts and bushings very closely.
Also, since your mechanic said the injection pump was fine - ask exactly what that means? Did he/she actuall check timing advance and make sure it's working correctly?
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Today's Featured Article - The Nuts and Bolts of Fasteners - Part 2 - by Curtis Von Fange. In our previous article we discussed capscrews, bolts, and nuts along with their relative hardness and thread sizes. In this segment we will finish up on our fasteners and then work with ways to keep them from loosening up in the field. Capscrews, bolts and nuts are not the only means of holding two parts together. When dealing with thinner metals like sheet tin, a long bolt and
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