Is is so hard to imagine we might all live inside of a computer simulation? It has been preposed many times by scientists and hollywood alike. Its impossible to tell, because for those inside the simulation we can not observe it from the outside (although I may be wrong link1 link2). However in todays wold of increasing virtual reality and games of extreme realism, its not so impossible to imagine.
I myself have created my own virtual world in the past with Opensimulator and even written up posts on how to build your own. Even if we don't live inside a simulation, the universe itself is some kind of giant, immense engine that runs on laws of physics we continue to discover at ever smaller and larger scales. Recenty scientists created a simulation of the universe which seems to approximate our own.