I'm having a hard time seeing how this would work inside our universe's physics. Sure, with lots of computing power, we could simulate a bunch of artificial life forms. But when those artificial life forms start simulating their own double-artificial life forms, they would be unwittingly stealing from the computational resources used to simulate them. So what's really happening is we are simulating two levels of artificial life forms, and then three, and then four, and with each subsequent stage our own physical resources are being divided further and further.

And, yes, if we happen to be somebody else's simulation, the whole project would be funneling our simulator's resources into increasingly abstract levels of simulation.