Board Thread:Lore Discussion/@comment-73.221.210.209-20160428064859/@comment-25350022-20160428094257

Good question. I don't think the game goes into too much detail about dreams, but I think dreams and nightmares alike can exist even without Vaermina. She might just have a good influence over the dreams of mortals through the use of the Staff Of Corruption. More specifically, she collects dreams and paints them like portraits in her realm of Quagmire, and as a result of that, leaves nightmares for those affected, to endure.

This is addressed within the quest Waking Nightmare, through dialogue with Erandur.