Simulated reality is the hypothesis that reality could be simulated—for example by quantum computer simulation—to a degree indistinguishable from "true" reality. It could contain conscious minds which may or may not be fully aware that they are living inside a simulation.
The simulation hypothesis proposes that all of reality, including the earth and the universe, is in fact an artificial simulation, most likely a computer simulation. Some versions rely on the development of a simulated reality, a proposed technology that would seem realistic enough to convince its inhabitants the simulation was real. The hypothesis has been a central plot device of many science fiction stories and films.
"What's real doesn't matter. What matters is how we live our lives."
"To an artificial mind all reality is virtual."
(Quotes from The Animatrix, which I personally found to be very thought-provoking.)
I believe dreaming is a way to simulate reality, or at least what we perceive to be reality, so we can experience events in safety.
The big question for me is, would I live any differently if I knew the true nature of reality? I don't know.