Tales from the SMP was so good, and it brings up a lot of questions/adds a lot of lore to both Karl and Dream’s characters.
Karl’s character is now established as an ages old, reincarnated or perhaps immortal being. I saw some takes about him being a time traveler, which could also be true. Somehow, someway, he was there for these stories- not as a character, but as the narrator. It wasn’t a character who is similar to him, it’s him. He is incredibly old, and outlasts the SMP as a whole. He’s been there since the beginning, and maybe even longer.
Dream too. This event expanded the Dreamon lore so much, just because of Dream forgetting to change his skin, lol. Dreamons are now established to live in the same bodies for hundreds of thousands of years. It also shows why Dream chose the SMP land specifically and why he’s so protective of it- he’s lived there forever.
I think that Tales from the SMP is Karl’s way of teaching the SMP members about stories he’s lived through- and Dream just decided to tag along. Maybe Karl’s even a time traveler, physically going back and cataloguing these stories? I’m not sure exactly, but I am super excited to see what happens next week with the Beach episode and where it all goes from here.