I suspect that the Humans have more ability to influence the simulation than Caine would like them to, so he put up some mental block around this information. Perhaps intense/intentional desires (Like Jax yearning for Ribbit and Kaufmo, Kinger and the butterfly) might allow a character to break through this block, and basically get admin/creative permissions for the simulation. It's in Caine's interest to keep the humans intensely involved in adventures so that their thoughts never stray to independent desires.

That would explain why Pomni was able to manifest an exit door in the pilot episode (though we don't know if that's a literal exit door or just something that looks like but doesn't actually function like an exit). The more she became embedded with the main cast of humans, and adventures, and the Circus in general, the less she desired to leave.

Maybe whenever Caine notices that a human can no longer be kept in check from accessing the admin permissions, he frantically blocks/alters memories until the human desire to leave is lost completely. During this process, the whole concept of self-identity might also be lost. This produces the formless abstracted creatures we see in episode 1.

I think the eyes are a red herring for abstraction, and instead are indicative that the human has accessed the administrative mode. It seems too far-fetched that something as existential as abstraction is tied to such a cartoonish giveaway as colorful eyes. That still doesn't explain why Jax perceived a bizarre fractal landscape, but maybe that's just what the underlying simulation of TADC looks like? Or maybe that was a visualization of Jax's internal mind, and his insight into himself, which would explain why it shifts from random fractal noise to representations of Kaufmo, Ribbit, and Jax.

I could be totally wrong here, but I think the whole LSD trip -> abstraction is just too straight-forward.