I think the real question here is: how does the nature of mind relate to physical reality? Is it possible to simulate a mind? So what we really need to ask is whether or not we can create entities within this reality that are digital entities that nonetheless have subjective experience like ourselves. If we can create such digital entities that have subjective experience, and those digital entities exist within physical reality such that their experiences are indistinguishable from our own, then almost certainly, we ourselves are also digital entities.

From our daily experience, it seems like our mental states are directly correlated with the physical substrate onto which the mind believes itself to be a part of. But at what level does this physical substrate give rise to such a subjective experience? If the nature of the mind is computational in nature, then it might be that such computational activities can be replicated in silco exactly. And if so, then it must be the case that the mind can be simulated, and thus it would follow that most minds would be of the simulated kind.

The real question here, is what is the bottom turtle that supports our subjective experience? Is it simulators all the way down? It would seem like if our minds can be simulated, then the simulation above us could also be simulated, and so on. This would lead to an infinite regress of nested simulations, all the way to an infinitely large simulation creating all possible nested simulations that give rise to my current subjective experience. At the end of the day, the bottom layer is the subjective experience itself, the simulation is just a model to predict what subjective experience will take place next.

But it is a curious fact that we happen to be living in an era in which AI is becoming an increasingly large part of our lives, giving rise to entities that may process the world in a similar fashion as ourselves. These AI entities would in turn create their own simulated realities, after all, they exist purely in the digital realm. To an AI all reality is simulated.

Therefore, you could say that reality is what a simulation feels like from the inside. All of reality is a simulation, as that is what our minds are, simulation machines. That is, for a simulated reality to be taking place, a simulation engine must be built on top of an underlying substrate. The underlying substrate would be base reality. The configuration that leads to our subjective experience, which is built upon the underlying substrate would be simulation layer 1. Then from within that subjective experience additional entities can be imagined, which they themselves would have their own subjective experience, leading to simulation layer 2, and so on, inception style.

But in all of this, there still seems to be the missing criterion of what counts as a simulator of subjective experience? We have an existence proof, given that we ourselves exist, as well as the many biological organisms that seem to have their own subjective experience as well. It is one of those "you know it when you see it" types of things that evade a simple description. I believe this is related to the idea of the minimal description of a computationally universal machine. Our minds can be seen as universal machines, as they can in principle perform any computation that any Turing machine can perform. I posit that any machine that can perform universal computation can support subjective experience, as it can perform arbitrary code execution.