sorry for the late reply been in bed all day ( i work nights)
blue/white smoke suggests that the there is excessive oil in the combustion chamber also water from the cooling system.
this suggestes a blown head gasket or the gasket between the barrell and crank cases which could have been damaged from the following.
and you think the sound came from the top of the cylinder.
from this its sounds like the new exhaust system has caused the bike to run lean. causing it to run hot and this can lead to detonationion in the cylinder ( bike fires early due to heat igniting the fuel rather than at the correct time by the spark plug) . detonation can damage the piston cause piston slap and burn valves so you may have over heated the piston and burnt and damaged the rings and barrell.
the piston slap would explaine the banging, the bits that have broken off the piston would explain the grinding and the fact the oil ring is damaged would explain the blue/white smoke.
so it sound to me like a new piston and barrell
all though from
experience i had a similiar senario with a k5 pointy but under inspection i found that the big end had spun on the crank. so until you dig into it you can t be too sure.
both jobs are quite big jobs to get in and put right and require dropping the engine out of the frame.
to check the piston just whip off the rear head, cams and chain and you should be able to see if there is any scoring on the cylinder walls and any damage to the piston plus usually after a detonating bcylinder leading to piston failure the loose bits of metal will be welded to the crown of the piston.
to check the big end slide off the barrell then remove the piston from the con rod then if you push and pull gentley on the con rod you will be able to feel if its spun the crank there should be no movement up and down but a small amount of left to right play try not to get the two mixed up.
all the best
MJP
p.s. if it is either of the two rather than just replace the parts i would strip the full engine and give it a full clean out as any debries from the damage can block the tiny important oil galleries and cause damage later on.