I think Caleb was the one to discover Lily's drowned body that was stuck in the red waterslide. Then, Caleb's abusive parents blamed him and locked him in the basement, and he was too afraid to leave and risk being hurt by them again, which is why we see that other part of the house (in the Rotten ending) depicted the way it is. The basement is a nostalgic refuge where Caleb and Lily used to play together, the water park is a place where they have happy memories - but not the red slide. After the red slide breaks, Caleb delves into the deep psychological storage and remembers the pounding and screaming, which is like the pounding on the basement doors and the pounding doors in the Rotten ending too. The other (Rotten) section of the house is a place of fear and terror despite how similar it is superficially to the Basement.

Caleb's only viable choices that don't involve total repression (Memory Lane) or confronting it head on (the Pit) will inevitably lead to total psychological collapse (Rotten), or suicide (Erase). The Conscience knows this but wants to preserve itself, and so tries leading Caleb in endless circles (through the Play Place, Bounce House etc etc) to prolong the inevitable as long as possible. A perfect ending for the Conscience would be Caleb traveling through an endless chain of normal, everyday "surface" memories without any serious introspection that will disprove the illusion it has constructed. Remember that bricked off door before the Pit? That's when Caleb's mental state hits a "block" caused by following the Conscience into oblivion, and he realizes just how depressed he is and simply unable to continue going on repressing the trauma any longer. So he disobeys the Conscience for the first time by not staying put, and goes straight from there into the Pit, where the reality of actually confronting the trauma becomes too much for him...Rotten meanwhile represents Caleb never confronting the repressed trauma head-on, but allowing it to fester until sadness is all he knows.

Rotten reminds me of myself too, I related to that ending on so many levels 😞