In LSD the player navigates through a psychedelic dream world. The idea is simply to walk around and explore things in a dream environment. There are many strange environments in this world, and one way to travel through them is by foot. However, if the player bumps into walls or other objects in the game, they will be transported to another environment instantaneously through a system called "linking". Bumping into people, animals, or special objects usually results in a stranger dream.

Each dream can last up to 10 minutes, after which the player will 'wake up', when the screen fades away and the player is sent back to the game's initial menu. However, if the player falls off a cliff or into a hole in the dream, then the player will wake up immediately. There is a graph that appears at the end of each dream that keeps track of the player's state of mind; the states are Upper, Downer, Static and Dynamic, as referring to the environments and the general feel of the dream the player just went through. Past states may have effects on later dreams.