Living in a Material World...or a Digital World?

In the movie The Matrix, we explore the possibility that we are human batteries living in a simulation. This of course is an absurd fantasy. It is much more likely that we are not human at all.
Our own technology is quickly advancing to a point in which we can run a simulation so complex that it is virtually indistinguishable from reality. Take video games as a crude example. We have an expansive 3-D world inhabited by models, bots, and avatars exhibiting limited artificial intelligence. A human player may interact with this world or merely observe it.
According to Moore's Law, our computing power doubles every two years. This exponential growth opens up the idea that it wouldn't be long before the AI becomes human-like and the simulations perfectly realistic. There is some debate whether Moore's law will continue into the future as the idea of quantum computing is explored. However, even if our progress slows, it will still progress.
What's all this have to do with The Matrix? I'm saying that there is a possibility that we are living in it, but not as humans jacked into the machine, but as the machine itself. We could be the artificial intelligence in a digital world.
This wild theory can also be applied to some of the wild science we are experiencing—both on the very large and very small scale. Many scientists now believe that the universe is like a sheet of space-time shaped into a sphere or a donut. One of the implications of this is that a ship could fly through space in one direction and eventually end up where it started. This is how many simulated worlds work. If you move past the edge of the game map, you end up on the other side.
As far as the very small, we have quantum physics. Early findings seem to show that the activity of particles behave differently depending on whether or not the scientists observe them. It can even be said the they don't exist until observed. Remember the old saying "if a tree falls in the forest and no one is there to hear it, does it make a sound?" It's kind of like that. It is also like a game that only needs to call up the areas of the simulation that the human player is interacting with.
I'm not going to say I believe this is the case, but I do find it more likely than, say, aliens visiting. As we understand the universe, no ET could travel the distance to earth within any realistic lifespan. The need for faster-than-light travel, extremely long life spans, cryogenics, and extreme alien motivation; are all more unlikely than what we are already on track to accomplish. If our world is not a simulation, it is likely that we will one day create a simulation with AI that do not realize they are not "real." In fact, the both could be true, allowing for a simulation with a simulation.

My head just exploded.