Have you ever thought that's what you're doing? When you wake up and go about your day, you've plugged into the Earth simulation after a day's work. Then you go to sleep and wake up in the base reality and go to work.

I don't really believe that mind you, but it's fun to think about.

I think this would be detrimental. Dreaming is, more or less, your brain's GC cycle, so it's not a path you want to put arbitrary "computation" on.

Based only on my own experience I feel very strongly that an important element of sleep is testing. Seeing how I would react in various situations, with a particular focus on situations in which in real life I've performed below expectation, until I seem to get it consistently right in the dream. Also testing how much I would enjoy a result I work toward or consider working toward when awake.

You'd wake up exhausted.

Invest in a mouth guard first...

You must have very pleasant nightmares.