"In the Earth year 2039, the world was facing imminent destruction. As the final hour approached, some of the chose to flee into VR, or virtual reality. Apparently, all they had to do was throw on a helmet to be transported to another world. But that was imaginary- a illusion. The world they had escaped to was this one- one known as the Aetheria Server."
"After having spent thousands of hours in this virtual world, most of them had made countless friends and wanted to say goodbye. They were all the most hardcore of game addicts, and they'd spent more time in Aetheria than in their own reality. Not many of them even had friends in the real world. Some of them didn't have family. So it was only fitting for them to spend their last moments in a world they cherished, surrounded by virtual friends. . . ." -Excerpt from Diary of a Wimpy Villager book 16, or Diary of an 8-Bit Warrior, Forging Destiny
The Crash (also called the Event or the Cataclysm, among others) is an apocalyptic event signaling the destruction of the Terrarian homeworld. It was the final event of a world war known as "Ragnarok," and through some means, brought players (or rather, Terrarians) to what can only be a real copy of their beloved server. No one knows how or why it happened, but one thing's for certain: no one will be the same.
In the year 2039, Earth is said to have been destroyed in a devastating nuclear exchange between multiple countries. Thousands, possibly millions of players logged into the Aetheria Server as Earth faced the certain destruction. Those connected lost consciousness, and woke up in the new Aetherian World: a hostile world which killed many of the players during the first night. It is said that all Legionnaires woke up in Dawnsbloom.
Everyone retained their character data. They had the same appearance and race as they had when they entered Aetheria. Unfortunately their items, statistics, and skills have all been erased. The only two who are known to have transferred with items. Kolb with the legendary sword Critbringer, and Ione with Bossender. Everyone else received meager items such as wooden tools and leather items.
Since the event, nobody is able to contact outside Aetheria, or log out. The Network sub-menu, which features all sorts of data regarding their network connection, lists their "ping" as zero.
(See also: Fan Theories)
The Crash was caused by nuclear warfare and bombs being dropped on Earth. There are many theories to how "Aetheria" came to be.
Advanced Machine: Entity could've downloaded all the players' consciousness into a machine. This is unlikely as technology of this sort is unheard of. Another believer theory is that the world itself is mechanical, but all NPCs are of real intelligence. Humans and NPCs have the same cognitive ability.
Aliens: Aetheria may have been created by aliens as a test. Human minds were transferred to the Aetheria server.
EMP: Aetheria could be created by an EMP or an Electromagnetic Pulse generated from a nuclear bomb. The connection was disconnected and anyone connected was stuck in Aetheria.
AI: Most of the players in the Crash are the most hardcore of gaming addicts, spending more time inside the server than actually in real life. With some complicated coding, it is possible the "humans" are just characters the computer copied off personalities in the real world.
Real World: This is the most possible theory, which states that Aetheria is a real world. The Aetheria server was created as a "proving ground" to prepare the players to enter Aetheria. Notch and Entity summoned the Terrarians in a final straw.
Most Possible: This is the most possible theory. The future for us is the past for others.
Procedurally Generated: The world the humans live in is a new one, and it has, since it is new, only some places have been fully built, and the first and second wars happened here, so that is why there are fewer civilizations.