When adding a Navigation block to a document, you see the block's placeholder state.

There's a number of things that this UI is trying to do, including:

1. Create a new, empty menu.
2. Create a new menu using a sites existing Pages.
3. Choose a previously created menu to populate a new menu.

I think the dropdown UI is a little complicated, and the current copy is awkward to read. There's an issue to update the copy, but it's kind of stalled; The UI is difficult to explain.

Looking at the Image block for inspiration I wound up with something like this:

This feels a little easier to understand, but it is still a rather large representation of a real websites navigation. Lets take a look at it in the context Full Site Editing, where you would be adding a Navigation block to a page template:

After digging through more of the previous Issues and PRs around this subject, I tried rethinking things a little bit; What if we default to adding an empty menu (1 above), with shortcuts for adding existing Pages or Menu's (2 and 3 above):

An alternative to this is to default to a menu containing all top-level Pages, with a somewhat hidden option to remove all Link blocks within the menu: