Sleep is still considered a mystery, despite intense scientific investigation. Here we present the first complete biological theory of sleep. The role of sleep is to restore the optimal homeostatic state, which is essential for tissue performance and health. Non-rapid eye movement sleep (NREMS) restores cortical and most other brain neurons, via relaxed global activity managed by thalamocortical circuits. The role of REM sleep is to restore acetylcholine (ACh) neurons, which support focused responses and hence cannot participate in global oscillations. Sleep enhances learning and memory via state restoration and ACh-affected paths. NREMS induces a lack of consciousness because global synchronous activity prevents focused responses, which are essential for consciousness. Dreams result from focused neural firing during sharp-wave ripples and REMS, and have a sense of reality because they involve the same neurons representing focused perceptual responses during wake. Anesthetics utilize a variety of mechanisms that prevent focused responses.