The Morphogenic Engine is a process developed by Dr. Rudolph Wernicke which enables individuals, on the verge of complete madness, to control sentient nano-swarms through lucid dream states. Though originally developed for use by Nazi Germany, Murkoff used Wernicke's research to build an assembler in Mount Massive Asylum's underground laboratories, which they used to allow patients to take control of the Walrider via lucid dreaming.
The Morphogenic Engine is employed by Murkoff to allow patients, while being carefully monitored, to enter prolonged lucid dreaming states, and control the Walrider, acting as its host.
The exact details of how the Morphogenic Engine works are unclear, but some aspects can be discerned from confidential documents, dialogue with Dr. Wernicke, and direct observations by Miles Upshur and Waylon Park.
Prior to interfacing with the Engine, patients are subjected to "therapy" sessions designed to induce extreme mental states. This is intended to trigger a psychosomatic response in the patient's bodily systems, which renders them more receptive to the nanoswarm production and control process. The nature of this therapy is extremely taxing on the patient's sanity; as stated by Dr. Wernicke, "only a test subject who [has] witnessed enough horror [is] capable of activating the engine."
While controlling the swarm, patients are placed in a spherical fluid-filled container, with life-support tubes inserted into various orifices. The patient's body is injected with a stream of precursor molecules, which are then assembled by the patient's own cells into nanites (nanomachines). If the patient is not receptive to the nanite-production process, it can rapidly cause the formation of lesions and tumour-like growths.
In Outlast, the Morphogenic Engine is seen in the Underground Lab. Miles is tasked by Dr. Wernicke to kill Billy Hope, hoping to destroy the Walrider. Miles first disables other mechanisms keeping Billy alive, and then proceeds to override the failsafe of the Engine, causing Billy to die, and releasing the Walrider.
In Outlast: Whistleblower, Waylon is tasked with helping the computers in the underground lab communicate with an ASL unit, and cameras inside of the pods that keep Variants alive, and stable. He was subjected to the machine's experiments when the email was discovered, but the Walrider's escape freed him before he devolved into a Variant, allowing him to function normally. He did however have a short period of time in which he would hallucinate in the presence of the Walrider, but it seems to be a side-effect.