This expression is more usually spoken as ‘the stuff of dreams’.
In the magician Prospero’s speech in The Tempest he alludes to the gods and spirits in the play, which are imagined and apt to blow away in a puff of smoke. Shakespeare is also playing with the idea that the play itself evokes and requires a suspension of disbelief on the part of the audience, which also soon melts away when the play is ended and the characters return to being real life actors..
From Shakespeare’s The Tempest, 1610:
Prospero:
Our revels now are ended. These our actors,As I foretold you, were all spirits, and
Are melted into air, into thin air:And like the baseless fabric of this vision,
The cloud-capp’d tow’rs, the gorgeous palaces,
The solemn temples, the great globe itself,
Yea, all which it inherit, shall dissolve,
And, like this insubstantial pageant faded,
Leave not a rack behind. We are such stuff
As dreams are made on
Is rounded with a sleep.
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