If all they had to do to permanently protect Nirn from Oblivion was destroy the amulet, then why didn't they do that immediately upon its creation?
The Amulet is more like a supped up soul gem for dragon souls, though that's a gross simplification akin to saying Elder Scrolls are only good for divining prophecy.
The Amulet is actually Alyeid in origin, http://www.uesp.net/wiki/Lore:Trials_of_St._Alessia http://www.uesp.net/wiki/Lore:The_Chim-el_Adabal http://www.uesp.net/wiki/Lore:The_Chim-el_Adabal http://www.uesp.net/wiki/Lore:Chim-el_Adabal:_A_Ballad is a whole different matter entirely. Strictly speaking, smashing the amulet...would have done nothing. Again, it contained the collective souls of all the different emperors up until the point of Martin smashing it to itty bits, releasing its power and Martin promptly absorbing it. Doing that before would have done basically nothing. Maybe.
Also, the Dragonfires, while important...wasn't essiential until the Oblivion Crisis. Tamriel has gone may giant stretches of time without Daedric hoards pouring out all over the place without an empire ruling from Cyrodiil. The only presecdent we had was when Mannimarco purposefully twisted the ritual to allow Molag's influence to spill over, and the second time when many of the other Towers reinforcing Mundus had already collapsed, meaning having another would ultimately be the straw that breaks the camels back. In this case, it was White-Gold. The Daedra actually made it a point to attack and destroy Crystal-Like-Law as well.
Smashing it unleashed a sizeable soul-fragment of Akatosh, explaining the whole Rargh-Dragon thing in the climix of the Oblivion MQ.
Makes me wonder... was the Avatar of Akatosh basically Martin invoking a magnitudes-more-powerful version of Dragon Aspect?
Possibly. Its always what I thought was happening, since Bethesda took Martin smashing the Amulet to absorb its power and ran with it making what we now know about being Dragonborn from Skyrim. The Dragon Aspect Thu'um probably at least taps into some form of it at any rate. I mean, Ysmir is credited by the Nords as actually appearing as a dragon, so who knows. Miraak thought if he absorbed the PC's soul, he would become too powerful for even Mora to handle.
The dragonfires are a single piece of the puzzle. There are also several Towers, natural and artificial, that help to keep them distinct, probably along with some other things that I'm forgetting. Without the dragonfires, the barrier is weaker, but doesn't disappear. It also required a Dragonborn, not a Septim, which is why it worked at all before the third era. It just happens that all Septims are Dragonborn. During Oblivion, some of the towers were damaged or destroyed, weakening the barrier. With the dragonfires out on top of that, and Mythic Dawn agents working to punch holes through on their side, and the Daedra using the sigil stones, they were able to get some forces through to weaken the barrier by hitting specific targets, so they could send more forces through who also weakened the barrier and so on. With more Towers down and Daedric activity at an all time low, I'd say that the new statue is more effective than the dragonfires were.
The Amulet has been destroyed and the Dragonfires have been replaced with that statue that used to be Martin which works all the time instead of needing specific conditions. Currently, Nirn is the safest it's been from Oblivion in a long time, judging by the number of Daedra seen in Skyrim. There's still the occasional weak spot, though, and the Princes are always a danger. Also, if the dragon statue or enough http://uesp.net/wiki/Lore:The_Towers were destroyed, there could be another Oblivion Crisis. Currently, Ada-Mantia and Snow Throat are the only ones that are probably fully functional, Red and White-Gold are either non-functional or weakened, Crystal-Like-Law and Walk-Brass have been destroyed, Orichalc is presumed destroyed, and Green-Sap's status is currently unknown.
Also, saying the Amulet is just a relic that didn't really do anything is a huge misunderstanding. The power it has is very real and tangible, and with it ended up causing the Soul Burst and subsequently repairing the damage it did, which is incredibly significant just going by the sheer scale of things. Not entirely sure what else it can supposedly do, but its up there with the Heart and the other actual Towers in terms of metaphysical significance.
It's been said that Saint Alessia became the first stone in the amulet, the big red one.
Is this to be taken literally? Has Alessia's soul been stuffed into that stone with a piece of Akatosh?
What about her body? Did she ascend in one piece and leave no body behind, or is she secretly buried someplace?
I had an idea for a Mod called "the lost tomb of Saint Alessia" in which some cult is going to a lot of trouble to keep everyone away from something, something which would cause a lot of trouble if it was discovered.