I've been entertaining quite a few theories on what the sideways reality is. My original theory was that the bomb created a sort of Shrodinger's cat scenario. The bomb both destroys the Island and doesn't destroy it. When it doesn't it caused a time flash instead putting them back in present time. I theorized that WHH was true, and that they always went back in time causing the Incident, and that it always created the two realities. However, part of the theory I now believe to be wrong, is that they'd merge. The reason I no longer believe this to be true, is due to the theory I'll be proposing in this thread.
My second theory, was that they were experiencing a dream alt reality like Desmond did in Flashes Before His Eyes. This seems possible given that both Desmond and the Losties detonated the same energy. So it doesn't seem unreasonable that they'd experience a similar dream world. There are holes in the theory but it still seems possible.
However, I think we're becoming lost in all the possible things the flash sideways could be, and overlooking why the writers put them there. Obviously the easiest thing for them to do would be to go along with the WHH clan back in S5, and just allow the Incident to be a time flash, which they did in the one reality. So the side flashways isn't necessary to get from point A to point B to conclude the story. This leads me to believe that the flash sideways is a literary device that won't directly affect the original timeline but will affect our understanding of it.
Whether the sideways reality actually exists, whether it's a dream, or whether it's a what if doesn't matter. I don't believe that it's the ending to LOST, though if it is, it would completely discard my theory. Most people have seemed to assume that if the flash sideways are simply a literary device, they're to show that the Losties lives would be connected no matter what. I don't agree. And now, sorry for the long preface, but here is what I believe the purpose of the flash sideways really is. It's to show the implications of a world where the Island is destroyed.
We now know that Jacob was the guardian of the Island, and is seeking a replacement. This seems like a hollow plot though, if we don't know what it needs protection for. I believe that the Losties will defeat Smokey and a replacement for Jacob will be found. The Island will be protected and it'll be a tragic but redemptive end for the story. However, this is a meaningless victory if we don't know what it's a victory over. So it seems reasonable, that the flash sideways reality, a world without the Island, where it's guardian failed, will end. The world will be destroyed. This makes the nature of the reality unimportant. Like I said, whether it's a dream, a what if, or an actual reality, the point is to show us how important the Island is in the main storyline.