I am not convinced that rec is to blame here. It certainly can cause infinite recursion, because it computes a fixed point, but I don’t see that happening here…
Can you try removing all the overlay related stuff, rebuild your system, and then add it back, but without the part about nix.nixPath, try to rebuild your system again and see if things work?
(you need to rebuild twice like that, because the NIX_PATH on first rebuild will still have the old value)
It looks to me like you import the overlay twice (although I don’t quite understand why that should cause infinite recursion either…).