i would argue that there is precedent for the second hypothesis; in GSC and HGSS, after Red has retreated into the mountains, Lance is instated as champion, rather than simply remaining an elite four member. this would suggest that, in the event of a champion disappearing, their position is...
in Red, Blue, Yellow, FireRed, and LeafGreen, Lance has a very interesting choice of words upon his defeat; "You are now the Pokemon League Champion! ...Or, you would have been, but you have one more challenge left. There is one more trainer to face! His name is... <insert whatever you named...
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