I think that the Restricted Birthright citizenship which is most common in Europe tries to navigate somewhere between those two extremes - in it basically if you're a Resident in that country for more than X years (from what I've seen usually X years is 2 years) then your children born there get citizenship.

It filters out freeloading - well-off people who have no personal investment in a country and its future and never contributed to it in any way, just flying over and having their kids there to give them citizenship - whilst still extending the same rights as locals have to those who, whilst not having the local nationality, are participating members of that society.

I think the fairest way is to give equal treatment (including giving the local nationality to their children and making it available to they themselves after a few years living there) to those who are participating members of a society but not to those who are not members of that society, and that would also mean that the fairest treatment would be that the children of local nationals who have long ago left (and the children themselves never in fact lived there) do not get that nationality automatically for merely their parents having it.

Ultimately I think nationality should be earned by living as part of a Society and when they're born children, having not have had a chance to "earn" it, would inherited that from the or parents.

That said some level of obtaining nationality based on the nationality of one's parents makes sense to cover the time gaps of people who moved abroad and had children there before they could qualify for the nationality of the country they were born with, since otherwise those children would be stateless.

As for the decision mechanism being "years legally living in a country" it's just the simplest and most equal for all (passing no judgment for things like what people do for a living) way of judging "participating in that Society" whilst only excluding people who were neither invited in nor taken in because they've truly need help (i.e. it's only for legal immigrants and refugees).