I struggled with this issue, trying to make the default email as @mydomain.com instead of @mydomain.onmicrosoft.com.
Checked the proxyAddress on 365 and on-premise, I could see @mydomain.com on both of them.
When trying to make @mydomain.com as default, still got the same error.
Today while checking the user on Entra admin center, on Contact Information properties of the user, I saw the field "Other emails" and added @mydomain.com. After that I tried to make @mydomain.com default on Exchange admin center and it worked.