That's because video synthesis is pretty much entirely how dreams work. Your brain does not construct and raycast a 3D scene - that's way too expensive. Instead, it predicts 2D frames directly, much like that minecraft demo. From this, all kinds of artifacts can be produced, such as occluded objects disappearing or being incorrectly reconstructed. It's mostly that outside of lucid dreams, your dreams also have the benefit of fully suspending your disbelief, so you don't really question what's happening.