Dreams Vs. Reality

What is the difference between a dream and a memory?  The obvious difference is that a true memory is based on sensory input from some tangible reality, so memories can be shared between two people, and the memories tend to follow the rules of the tangible reality, in as much as the sensory input and processing thereof is true and accurate.  Dreams on the other hand, are not shared between people, and do not have to follow any rules, and are often of a fantastic nature.
But dreams are vivid narrative that we see in our mind's eye, and they can form permanent memories, especially if we contemplate them soon after waking up.  We are aware that they are false memories, but probably only because we remembered them as we woke from a sleep state, or simply because of their often fantastic nature.
Since dreams are a vivid narrative akin to the wakeful narrative that is constantly playing in our mind's eye, I would hypothesis that our wakeful narrative is more like a dream that is based on reality.  That is to say what we see in our minds eye has gone through the same intermediate processing as a dream, only based on true sensory data.
So if we are seeing reality, or a dream, or a vivid memory that we conjure up, we are actually seeing from some coalescing  layer that can take it's input from multiple sources and produce the symbolic information that our mind's eye turns into an illusion.  As we grow from infancy, we learn to associate that illusion with reality.
This would certainly explain many of the optical illusions that we have come up with over the years.  By the time our mind's eye 'sees' something it is already a memory processed down to symbolic information.  Our expectations based on previous memories fills in the details.  Which would explain why dreams tend to follow reality to a large extent, because most of narrative of a dream is filled in with our own expectations.
This would also explain the results of an experiment that I read about recently where by tracking brain activity, it was shown that decisions might be made before we are conscious of them.  How much of what we do is done without the benefit of our consciousness?  Certainly I find myself making coffee in the morning without being conscious of it, my conscious mind being busy planning my day, and all of a sudden having that cup of coffee in front of me with only a vague recollection of making it. And finally it would explain why seeing something with unexpected elements is often hard to recall in detail.
This goes towards an explanation of consciousness, but still leaves open the question about the "mind's eye" which seems at once removed from reality by several layers, but immediate and undeniable.  Our consciousness instructs our mind's eye to get it's input from a memory, a speculation of some future event, our current sensory inputs.  Or in the case of a dream, from some random impluse that melds memory, speculation, and occasionally from our current sensory input (as when we dream of something that is actually happening).