It wasn't an ok enough game, it was awful and made people question if Cerny was ever a good designer or if he had just lost his marbles.
However, it was a launch title so it still sold really well. In fact, as it happened it sold so well that it outsold Mario in the UK, which as you imagine triggered a lot of people and led to much mirth. People getting upset over this fact of course had to be continuously told how the game "really wasn't that bad" and over time this commitment by fans led to a general feeling that maybe it was "ok" as people forgot about their experience and hence their perception changed. This is known as the "Folklore effect".
Following this event things settled down and the battleground focus shifted from "will we get any good games on PS4?" to "will we get any good games on PS+?" This lead to huge arguments about indies vs retail titles and how that superficial classification is really quite useless. Knack was used as the poster child for the two main arguments of "why would you want garbage like this just because it is retail?" and "hey these games are shit, but it could be worse, we could have got knack!".
These arguments got worse and worse each month with gamers getting more and more wound up by the people claiming to actually want knack. Of course nobody really took these claims seriously, but they are so outrageous that people felt compelled to fight back against the idea and perhaps try to make the world a better place. The fact that it never actually appeared on PS+ just made it funnier each month.
This leads us to today where knack 2 is released and nobody would have even acknowledged the fact, except that it was mistakenly priced for free for a period of time. Even then I doubt most of the people who "purchased" it will download it. Because at the end of the day you can put a 2 after the title, but it is still knack.
So now the legend grows.
I think that's a pretty revisionist take on it.
It's actually that Knack wasn't that bad. It got a kicking from its reveal because it was the first PS4 game shown, the introduction to next generation, presented by the guy who designed the hardware itself (who himself was introduced as a games industry superstar).
Here it is, the next generation, the console designed by devs, for devs, the most powerful console in the world to date, let's see what it can do, in the hands of one of the most storied games designers of our time! And then they showed Knack, the most unexciting, middle-of-the-road character action game for kids, with an ugly mascot and charmless art style.
At this point there were still some people who could see worth in Knack. It wasn't a next-gen game and they knew it. It was a throwback to the games of their own youth. The Crash Bandicoot generation had a game coming out in that vein with some showoffy physics, and from the actual designer of Crash Bandicoot! Sure, such a game wouldn't be up to current standards, but there could still be something to enjoy about it.
The problem is that these people, and the people who didn't have that nostalgia for this kind of game, couldn't see eye-to-eye. Group A couldn't see it as anything but a bland disappointment, while Group B argued that while it's probably not going to win any awards, they still think they'll enjoy it. Group A saw this as mindless fanboyism and over-corrected their narrative to "it's terrible", which Group B saw as mindless fanboyism and over-corrected their narrative to "I'm really excited for it. Can't wait". The situation on both sides escalated through the game coming out, where Group A saw its reviews as proof that it was, indeed, a giant turd of a game, while Group B saw the reviews as proof that it was what they were expecting, if maybe 5 or 10 metacritic points below what it deserved.
Mario 3D World coming out at the same time was being held up by Group A as "this kind of game done right" (not really understanding that they weren't the same kind of game to Group B), and they would post in all Knack discussions/videos that everyone should forget that shit and buy 3D World instead. When Knack outsold 3D World, paired with Group B thinking it should have reviewed a little higher, both sides, in an attempt to ridicule the other, ended up in a place where they're
both sarcastically claiming Knack to be an incredible work worthy of all the GOTY accolades, and thus the meme was born. One side is doing it because they think Knack is shit, while the other side is doing it because they know the other side thinks Knack is shit, but the first side never really understood that.