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1. In reality, there is almost no difference. The second option is more fun because you don't know when the GM will give you a boost, while the first is more stable. Overall, I have a very positive attitude towards leveling – on the one hand, it encourages taking more risky decisions in an attempt to gain experience, and on the other hand, it provides an additional reason to protect the character's life. However, in the realities of experience-based gameplay, where parties are quite short and someone is constantly dying, requiring a new character, leveling should not be a fundamental element, and a new character should be weaker than a fully leveled one, perhaps two to three times weaker, but no more.
2. The main problem with the class system is that characters of the same class often look very similar. This can be solved by making the system more complex and extensive, but in the case of experience-based gameplay and manual calculations, we can hardly afford it.
Plus, as Ment already noted, the concept often doesn't fit within the class. Multiclassing is an unnecessary complication of the system, and in the end, it will be approximately the same as with the already existing standard classes, only with extra hassle.
3. Well, if the GM doesn't benefit from battles in such a system... In reality, it still doesn't work. There are already enough reasons to use your brain, even though battles are not the main element of the experience-based gameplay.
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The GM determined their strength, limitations, and possible weaknesses numerically, based on ideas about balance and the physics of the world. Then it is recorded in the character list, and we play. But this seems incredibly complex to implement.
I imagine a huge mess after a party wipe...
E si sui vius, er mi grans benananza, e si ieu muoir, er mi grans deliuriers