system
Given the following post, respond as if you're commenting on Reddit:
human
ELI5 Mulholland Drive (film)

What the fuck did I just watch.

I read the Wikipedia article about the film - it feels like my brain has been doing somersaults after watching that. Have literally no idea about a number of things in the movie.

My interpretation was that "Diane" was a paranoid wreck and failed Hollywood star, who would dream up alternate circumstance for herself (i.e. Betty).

Any explanations?
gpt
Well you've got it pretty much.  The most widespread interpretation is that the first part of the story (Betty) is a dream, dreamed by Diane.  The second part is real but full of flashbacks, so it can be confusing.

Basically, in chronological order: Diane comes to Hollywood hoping to become a famous actress.  She meets Camilla and falls in love with her.  The truth is that she's a failed star as you said, and Camilla is actually toying with her.  So she hires a hitman to kill Camilla.  She then dreams the perfect life for her and Camilla (as Betty and Rita) which is the whole first hour or so of the movie.  Then she wakes up, full of guilt and regret, and kills herself when confronted with her inner demons.

The movie makes much more sense if you watch it knowing this.  Through the story of Diane, it's a piece about the Hollywood life and how it corrupted and destroyed a naïve young woman.