The Dream World is a parallel dimension that appears in Cloud’s Forum Adventures. According to Cloud in Season 5, the Dream World receives its power from the Dreamstar, which is then distributed to seven sages.
The seven sages of the Dream World are as follows: Cloud, Megar, Spectra, Luna, Soul Star, DragonSoul, and 11tailedwolf. Each sage possesses an incredible amount of power that they can use to their liking; however, the actual limits of these powers and whether or not their properties change depending on the user is unknown.
The Dream World is first mentioned by Luna in “The Pilot Episode”. He explained that he could use the Dream World to send customized dreams to other characters.
In Season 3, Luna revealed that he “applied” for Dream World powers and was accepted soon afterward. Cloud’s battle against Luna also took place within the Dream World itself. After Spectra revealed that Luna was playing the role of a puppet all along, Cloud fought her in the Dream World as well. However, Luna urged the protagonists to do battle elsewhere; apparently, battling there was a danger to the dimension’s stability.