SingularityHUB explains what Elon Musk meant when he said that we probably live in a simulation. Explaining how it would all work, the article goes as far as theorising that we're probably a simulation, within a simulation, within a simulation... But, whatever, it doesn't really matter.
There are many tricks we can use to reduce the computational power needed to simulate a universe to a degree we can handle. The most obvious being: Don’t render anything no-one is looking at. If you feel a slight tingling sensation in your body, this might be because you are familiar with Heisenberg's uncertainty principle and the observer effect. Modern physics tells us reality is such that the state of the smallest particles is dependent on whether they are being observed.
Next trick you could use: Make the universe seem vast and limitless even though it isn’t. This one is actually used quite a lot in video games. By reducing the details on far away objects you can save huge amounts of computational power and generate objects only when they are discovered. If this sounds hard to grasp, please take a look at the game No Man’s Sky — a video game in which a whole virtual universe is being procedurally generated while you discover it.
Last but not least: Add basic physical principles that make it amazingly hard or impossible to reach any other planet and keep the simulated beings stranded in their own world (speed of light and exponentially expanding universe — cough, cough).
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