“The physiological explanation as to what might be happening within the brain when we have either a lucid or non lucid dream is still probably best described by using the hypothesis of activation/synthesis. This might best be summarized in this way: Images arise in the brain when dreaming, even though there is no external sensory input. Such hallucinations are the result of the specific activation or senso-motor brain circuits which appear to link the brain stem to other sub-cortical centers and to the upper motor neurons of the cerebral cortex , or forebrain. If the higher-level neurons of the visual system are excited in the same way that makes them “see” during the daily waking state, they will process that signal as if it came from the outside world. In other words, our cortical neurons are simply tricked into believing the signals come from the outside. The brain can only recognize what true state it is in from the context and since most perceptions originate from our waking state, the REM-sleep activated brain assumes the context is the normal one of being awake.

When a dream becomes lucid:
Because the smaller aminergic neurons are inhibited in some way during REM sleep, or are simply testing up, waiting for the next waking and working day, the brain loses all its contextual and referencing faculties, and so accepts the most outlandish behavior of its inner happenings while still imagining its context as being “out there.” The brain ascribes meaning to internally generated signals simply because there is not external input, only memory, with which to build. Because the brain has lost its normal ability to be alert to both context and self-reference, it has no integral stability which tells it that you are hallucinating in a dream. Only when, for some mysterious or accidental reason, the self-referencing faculty suddenly awakes within the hallucination, do we find ourselves in a Lucid Dream. Somehow the aminergic neurons have managed to throw off their inhibitions and are suddenly actively awake.

Why we forget our dreams:
Normal REM sleep is switched on when the firing of the aminergic neurons is subdued. These appear to modulate, or control, the instruction to the forebrain and one of these instructions could be an order to record or remember a particular experience. During REM sleep these neurons fail to sense any message simply because they are inactive. This suggests that a sleeper on immediately awakening should be able to remember his or her dream and so be able to write it down. But if there is a gap of only a few seconds between waking and trying to recall the dream, it will probably be lost altogether.”

From: The Lucid Dreamer- A Waking Guide for the Traveler Between Worlds by Malcolm Godwin.