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Xenoblade Chronicles has always been a series of games that touches delicate themes, protagonized by deeply complex characters that are developed in powerful narrative arcs. In games as convoluted as these ones, every important cutscene shows new information that brings more depth to those characters and the worlds that surrounds them.
During the main story of Xenoblade Chronicles 2, it is revealed that the first and second numbered games are related in more ways than just aesthetics and theme, as players discover the common denominator between the worlds of "Alrest" and "Bionis & Mechonis".
Xenoblade Chronicles 1 & 2 - Connection #1: The Architect
From the very beginning, Xenoblade Chronicles 2 presents the myth of The Architect, the overseer deity in the world of Alrest. It is said humanity once lived at his side in Elysium, but they were banished to live outside in Alrest, with no knowledge of how to get back to their first home. The creator of the world and the father to all Blades, this godly figure is more myth than legend, and the truth behind his existence it's more dark than divine, as Rex will discover.
As you begin the final chapter in Xenoblade Chronicles 2, you finally reach Elysium only to find a barren wasteland in a space station. After a few moments of traveling, instead of getting to meet the god of Alrest, you find a wretched, damaged human, or what's left of him.
In a flashback scene, it is revealed that the Architect is, in fact, a human, and none other than an older version of Klaus, the scientist responsible for the planet "reset" in the original Xenoblade Chronicles. This character was later reborn as Zanza, the soul of the Bionis, and the main villain in that game in an endless fight against Galea, the soul of the Mechonis. However, given that this game happens in another world, how is it possible to see Klaus in Xenoblade Chronicles 2?
In the past, the Earth was ravaged by humanity's recklessness and by a massive war happening in outer space. These circumstances brought the planet to a point of no return in terms of survivability, so a group of scientists tried to find ways for humanity to find a new home. Klaus, one of the brightest scientists working on the space station Radhamanthus, devised a method to travel to other dimensions.
By exploiting the Conduit, a mysterious object that could open a path to another dimension for humanity to cross, an obsessed Klaus had the intention of taking humanity to another level of existence. Locking himself in the control room, he disregarded other scientists' concerns and turned the device on as the war reached its climax.
As a result, this instead caused a dimensional shift, wiping all life from existence and dividing the planet into two parallel versions, separated in different planes, side to side.
Somehow, Klaus survived and was torn apart in two halves, one per dimension. The first half survived along with Galea, who was originally another scientist in the orbital station, who tried to stop him from using the Conduit, with no success. Both of them were reborn as the Bionis and the Mechonis, two giants engaged in an eternal battle that led to the events of Xenoblade Chronicles.
The second half of Klaus ended up alone on the planet that is now known as Alrest, where Xenoblade Chronicles 2 occurs. This dimension had remnants and ruins of the original world, with the Radamanthus orbital station that hosted the Conduit being pretty much untouched. With nothing else to do, here he dedicated himself to repairing a bit of the damage he had done.
On the Alrest side, Klaus retained his original self instead of being reborn and obtained god-like powers that allowed him to develop ways to create life once again, from the wreckage of the original planet. This led to the creation of Titans, Blades, and the many races living on this planet. That being said, and ironically enough, his body was permanently scarred, connected to his other half by a dimensional portal that covered half of his body.
After Klaus finishes telling his story, he gives Rex and Pyra a final warning, since his impending death would cause the Conduit to shift away from Alrest, ending their chances to defeat Malos. After thanking Klaus for creating him and Pyra, Rex and his group continue their journey and run to their final battle in the game.
During the game's climax, you can hear the ending of the original Xenoblade Chronicles playing in the background through the portal covering Klaus' other side. This confirms that both games are ending at the same time, and after Shulk's group rises victorious from their final encounter with Zanza, Klaus' life reaches its end as well.
It is worth noting that during the original Xenoblade Chronicles game, there's obviously no apparent connection to other games as these weren't developed yet. However, the Definitive Edition added an aesthetic detail in the new design for Alvis, who now sports a pendant that suspiciously looks like a Blade Core.
Xenoblade Chronicles 1 & 2 - Connection #2: The Nopon Archsage
While the following events happen in-game during Xenoblade Chronicles 2, whether they're strictly canon or not still hasn't been officially clarified.
As an alternative game mode, Xenoblade Chronicles the Challenge Battle Mode. This takes Rex and the party to another place called The Land Of Challenge, where they meet with some confused Shulk and Fiora, who seem to be present there against their will.
Once Rex and Shulk greet each other and form an alliance, players can also go through some challenges that allow them to bring Shulk and Fiora back to Alrest as party members. It is possible to watch a cutscene where Rex, Shulk, Kos-Mos (from Xenosaga), and Elma (from Xenoblade Chronicles X) discuss the events leading to their meeting, and whether there's a mastermind behind those events.
The Land Of Challenge also makes an appearance in the Xenoblade Chronicles Definitive Edition, but no crossover cutscenes were present.