Both at the same time. My interpretation is that the events in Sierpinski are real and the result of some bioresonance-related lovecraftian monstrosity being unearthed. Falke and Ariane are both linked cosmically (likely due to their bioresonance and probable connection to Alina) Ariane's dreams are being impressed onto Falke, and by extension Falke is corrupting the colony and causing the space-time fuckery to happen.

My thinking is that the cosmic horror element/entity is comparable to the spiritual nature of the town in Silent Hill 2- the town does not have a will or goal, and does not judge or punish the characters involved, but rather the tainted spiritual energy of the town is making the strong emotions at play in the main characters' minds manifest into a constructed reality. Basically the events on Sierpinski are real and reality is being twisted by Falke and Ariane thanks to the discovery in the mine amplifying their bioresonance. This is also the reason we're constantly transitioning between locations in a way that doesn't make any sense- why we're able to retrieve items from recordings and flashbacks, why we're able to go from Leng to Rotfront. Our Elster is being ping ponged around space and time by the bioresonance at play. This is why we wind up on the Penrose after killing Falke- the act essentially slingshots Elster to the other end of the connection.