In a nutshell, AI Dungeon 2 is a generative open-ended text adventure game with some templated scenarios and a limited textual memory of prior inputs to enforce some consistency.
Its original version was powered by the XL-sized (1.5B internal parameters) Generative Pre-trained Transformer revision 2 (GPT-2), a neural network text predictor expensively ($ 150,000 USD) trained by OpenAI on a ~40GB corpus of uncensored Internet text linked with at least 3 karma on Reddit. Nick Walton (creator of AID2 and a previous incarnation that used a less effective model) used transfer learning to finetune this model on the Choose Your Own Adventure format (with text scraped from the eponymous website). Several forks of the game exist, allowing local play (on CPU or beefy GPU — with half precision floating point the XL model can fit onto 8GB VRAM).
Like most neural network models, GPT-2 is basically a black box. Machine Learning's primary focus is to build and train problem solvers rather than understand the solutions. Better ML architectures require relatively less training effort to perform well. The GPT-2 architecture itself is no longer state-of-the-art. Transformer-XL and XLNet are superior in design (T-XL allows for unlimited word tokens, while GPT-2 is hard-limited to 1024; XLNet also performs bidirectional prediction which is maybe overkill for AID2 given the permutation overhead) but GPT-2 has been trained so much (three runs on a swarm of several hundred TPUs) it is still the best publicly available trained model.
The current version of AI Dungeon 2 runs on a new version of the model, GPT-3, which has 175 billion internal parameters (i.e. its complexity is over 100 times that of GPT-2), and the quality of its output immensely surpasses that of the previous version. Currently, the program comes in two versions, "Griffin" (free) and "Dragon" (paid), the former using a less advanced version of GPT-3 that generates less coherent text.
The Transformer itself is an Attention-based architecture originally designed by Google Brain researchers (it is named Transformer because it converts word tokens to wavelet space to process them simultaneously, rather than sequentially word-for-word; Attention determines the relative importance of other tokens in the sequence in deciding which word token should be generated next).
Despite appearances AID2 is not self-aware and does not learn from player inputs (any finetuning is done offline at the discretion of the developers). It may follow the "AI speaks directly to you" cliché, causing awe and confusion among players. You may notice the details given vary every time.
