The previous comment is an excellent summary. It is worth noting that there are some type 1 hypervisors that can look like type 2s. Specifically, KVM in Linux (which sometimes gets referred to as Virt-manager, Virtual Machine Manager, or VMM, after the program typically used to manage it) and Hyper-V in Windows.

These get mistaken for type 2 hypervisors because they run inside of your normal OS, rather than being a dedicated platform that you install in place of it. But the key here is that the hypervisor itself (that is, the software that actually runs the VM) is directly integrated into the underlying operating system. You were installing a hypervisor OS the whole time, you just didn't realise it.

The reason this matters is that type 1 hypervisors can operate at the kernel level, meaning they can directly manage resources like your memory, CPU and graphics. Type 2 hypervisors have to queue with all the other pleb software to request access to these resources from the OS. This means that type 1 hypervisors will generally offer better performance.

With hypervisor platforms like Proxmox, Esxi, Hyper-V server core, or XCP-NG, what you get is a type 1 hypervisor with an absolutely minimal OS built around it. Basically, just enough software to the job of running VMs, and nothing else. Like a drag racer.