Scenario 1 began with a Big Bang when space started expanding, creating more actual space between objects forming within that expanding space. This produces a CMB radiation and cosmological redshift both of which we have observed.

How does scenario 2 work? The universe starts already huuuuge. And objects in the early universe must also start out huuuuge so they shrink for at least 13.8 billion years. How would scenario 2 create the observed CMB radiation and cosmological redshift?