Subcon, the Land of Dreams

Subcon, the Land of Dreams, is a cloud island located high above Yoshis' Island. Whenever anyone on the Mushroom Planet goes to sleep, their soul is transported to Subcon, where they live out their dreams until their body wakes up. Subcon is run by a species of fairy known as the Subcons.

How Subcon works
When an inhabitant of the Mushroom Planet falls asleep, their soul is taken from their mortal body up to Subcon by a fairy. The soul now becomes an image of their mortal body. The Subcons transform both themselves and that around them into different things that would fit in the dream, such as a Subcon turning into your old pet dog in a dream, or the cloud ground turning into the inside floor of an apartment. When the body awakens, the soul is taken back into the body. The Subcon form of dreaming is much more vivid and realistic than Earthly dreaming, which consists of the mind, unable to stay still, distracting the body with stories.

How Subcon used to work
Previously, Subcon worked by bringing to life whatever the person dreamed, rather than the Subcons changing their appearance. This old way brought up several nightmare creatures, such as the 8-bits, who plotted to destroy good dreams and cause nightmares. After their defeat in 646 A.F., the Subcons changed to the modern method.

Trivia

 * Donkey Kong was created in a dream Mario had before the changeover to modern method.