Type 1 AU is the same universe as our own (i.e. here in the real world), which means that the characters of the universe could potentially be able to discover that they are, in fact, fictional (at least, in the point of view of those who "created" them).
Type 2 is merely the same, but with references filtered out, and sociology adjusted to account for that (typically this is done by referencing from a time before the characters were created in reality).

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