Krakia?

they don't actually know, they're just assuming. the object in question is barely larger than your character so it's ridiculous to be saying it's "inside of it".
I believe this is what they're talking about:

much too small, and it's not as if it's only in one spot. it *could* be a transporter of some sort though. But saying there's a whole town in there is a little crazy.

But it appears quite far away, as if it could be much, much larger on the inside. I wouldn't doubt this new area being held within the confines of this Pyramid.