What is happening in the C# compiler to cause the following ambiguous invocation compilation error?

The same issue applies to extension methods, or when TestClass is generic and using instance rather than static methods.

class Type1 { }
class Type2 : Type1 {}

class TestClass
{
    public static void Do<T>(T something, object o) where T : Type1
    {} 

    public static void Do(Type1 something, string o)
    {}
}

void Main()
{
    var firstInstance = new Type1();
    TestClass.Do(firstInstance, new object()); // Calls Do(Type1, obj)
    TestClass.Do(firstInstance, "Test"); // Calls Do<T>(T, string)

    var secondInstance = new Type2();
    TestClass.Do(secondInstance, new object()); // Calls Do(Type1, obj)
    TestClass.Do(secondInstance, "Test"); // "The call is ambiguous" compile error
}