Acharya Prashant explains that the ego is the root of unhappiness and the foundation of the worldly cycle. He clarifies that while the ego is fundamentally without support or reality, it continues to exist because individuals treat it as a solid foundation for their lives. This is compared to a dream where everything appears real until one wakes up. People invest in their personal worlds, making decisions and taking actions that assume the ego is a substantial entity, even though it is merely a sense of self that lacks any objective or metaphysical grounding.