The shrinking of K1 is the result of the algorithm. As we previously determined, the algorithm pushes all players with the squish to a target that seems to be in the upper part of k2. Unless the algorithm is changed, in the long run, all players would end there and k1 would be empty at the start of the season and then players that win the first round are in k1. So it is working as designed, not sure it is working as intended.
In abstract form, the squish calculates your distance from the target (here in upper k2) and the farther you are from it, the higher the adjustment is to push you in direction of the target. So if you are above the target, you get pushed down, if you are below the target, you get pushed up.