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I had not seen this before. Given how Zelda 1's map is also supposed to be at the bottom of Zelda 2's map, I'm not sure how this all works together...

It just looks off due to how zoomed out Zelda 2's map is. Realistically Zelda 2's overworld is extremely huge. Possibly on par with Breath of the Wild.

Was doing some research awhile back, and it turns out that all of Zelda 1 takes place in the Death Mountain area of ALttP. Although Hyrule Encyclopedia is unreliable and considered non canon, it does make a lot of sense actually since Hyrule is no where to be seen in either Zelda 1 or Zelda 2

What? The sleeping Zelda in Zelda II is a different Zelda from the one in the first game? This is news to me...

Yeah in game it's not specifically stated that it's a different Zelda but it is in the manual. Originally Sleeping Zelda was supposed to be the first ever Zelda in the series but that was retconned pretty easily once ALttP was made and as we know now the very original was Skyward Sword Zelda.  Here's a brief little summary of The Tragedy of Princess Zelda I based on what Hyrule Historia gave us.

According to a legend passed down within Impa's bloodline, well before the events of The Legend of Zelda, Hyrule was a prosperous land ruled by a king who had a daughter, Princess Zelda, and an elder son, the prince. After the king passed away, the prince sought the pieces of Triforce that he did not inherit, but was unable to find them. A magician close to the king informed the prince that the king had told his sister something about the Triforce. The prince questioned her, but she did not say anything, even after being threatened by an eternal sleep by the magician. In his anger, the magician used a spell to put the princess into an eternal sleep, and died when the spell was completed.

Overcome with grief, the prince sealed his sleeping sister in the North Castle and ordered that all female descendants of the Hylian monarchy are to be named Zelda. While the princesses before this incident were named Zelda in honor of the original Zelda from Skyward Sword, this marked the beginning of Zelda being named so by law, rather than tradition.

To break the curse a hero must possess the complete Triforce, but obtaining the Triforce of Courage would prove difficult as the king of ages ago had hidden it within the Great Palace. Only one who proved themselves worthy would obtain it. In the end, Link obtained the Triforce of Courage and awoke the sleeping princess from her slumber.

Keep in mind this is indicated to happen at least century or more before Zelda 1 takes place which shows how the slowly Hyrule truly declined up until Zelda 1 and Zelda 2 AoL.

According to the official artwork as well, the new king (Sleeping Zelda's elder brother) was even threatening villagers with a whip kids and women alike.  One of the reasons Zelda 2 is considered dark is due to this twisted backstory that lead up to it.

Hi Shade Aurion, it's good to read that the project isn't dead. Speaking about the plot, it makes sense that this "Ganon's Shadow" is actually Yuga who tries to survive the death of his other half (Ganon) but still has his (and Agahnim's) appearance. I also like that Impa takes Sahasrahla's role and that Dark Link is actually Yuga/Ganon who desperately tries to revenge against the Hero (Link). However, I still don't understand what you want to do with Sleeping Zelda, is she actually the Zelda from Zelda 1 or another one like in the NES game? And so, is the prince the brother of what Zelda, the Sleeping one or the original Zelda one? If there is only one Zelda, how do you plan to change that plot? Regardless, the project is very interesting. And yes, this Zelda II Redux hack seems very well done.

I'm pretty sure it's gonna go by the original story/official timeline. The Sleeping Princess is one of the main reasons why Zelda 1 and Zelda 2 even happen. Making her the same Zelda from Zelda 1 wouldn't make sense at this point in time. Her tragedy before the events of Zelda 1 was one of the main reasons why Hyrule in Zelda 1 is in a post apocalyptic state and in decline. The Tragedy of Princess Zelda I is also important because she's the reason why every Zelda after her tragedy was named Zelda including the one in Zelda 1. Yes technically every Zelda game we've played, the incarnation of Zelda in that game was named Zelda but not every princess in the history of hyrule has been confirmed to be named so. If it were retconned to be the Zelda from Zelda 1 then the tradition the brother had set would have never happened and technically Hyrule shouldn't be in decline. Impa knowing the legend of what the king from several centuries would have never been told to Link since her ancestors would know nothing about it and it would also retcon the idea of her being known as ancient Zelda by the time of the Zelda 1 and Zelda 2. Sure not as ancient as SS Zelda but you get what I mean that her tragedy left a big impact on the land. The brother should still be the brother of Sleeping Zelda since this is his fault. In my opinion Zelda 2's story should stay as is, it's one of the best stories in the series and even considered one of the darkest next to Majoras's Mask and Link's Awakening. Plus if you think about it from a era of decline point of view, Hyrule gaining it's original Zelda from more than a century ago, their current Zelda who was saved six years prior to Zelda 2 and the full triforce once again in their possession, that leaves a Second age of an Era of Prosperity/Golden Era with the first one being before the Tragedy of Princess Zelda I. However I do hope there's a way to implement the Master Sword even though according to Hyrule Historia, it had become lost some time after ALBW and TFH.

Although I am bit surprised that Ancient Stone Tablets and BS Zelda are being added into the history of the timeline for this game since neither were canon and both technically ruin the Spirit of Hero lore from the prequel manga of SS and SS itself.