No. Just no. That explanation makes no sense and doesn't match with anything I've ever seen in any levels. A defence mechanism that instantly destroys you while doing zero damage to the enemy is completely pointless, there's no reason for Knytts to have kept one minor aspect of their fishy ancestors while undergoing the major changes needed to walk on land (and double-jump), and if the knytt are descended from fish then why can't they swim?
(Though if you put this explanation in one of your levels, I'll think it's funny and not question it.)
Going slightly more meta, only Juni ever "puffs", and only when she dies during gameplay, not in a cutscene. Judging by a few hints in the text of The Machine, the Knytt Stories are actually meant to be stories, the sort that young Knytt tell when gathered around a campfire. And the story doesn't end until Juni turns off the machine, or wakes up from her dream, or whatever it is the story is about. Certainly Juni can't die during the story - if she did, there wouldn't be any other stories. So I think the "puff" is the visual representation of the storyteller saying "I've lost track of where I was going with this, let me start over".