Dreams were a recurring plot device in Tony Soprano finally confronts a truth he had been avoiding: that Salvatore "Big Pussy" Bonpensiero was a federal informant. After the dream, Tony goes to Pussy's house to find evidence, and by the episode's end, the character — one of the most prominent in the show, and who audiences had come to love — is shot and his body dumped into the ocean. The dream is used to set up Salvatore's inevitable death, but also hints at how Tony's subconscious works.
The Sopranos, season 2, episode 13, "Funhouse" was the finale that tied up the biggest loose thread of the season: Sal being a "rat." Played by Vincent Pastore, "Big Pussy" was a long-time friend of Tony Soprano and one of the core of the DiMeo crime family. The idea that Sal was an informant first arose toward the end of season 1, when Tony's "dirty cop" Vin Makazian warned Tony that he had an informant in his crew, most likely Sal. The truth was revealed to audiences in season 2, episode 2, "Do Not Resuscitate," and throughout the season, Sal's activities as an informant were regularly shown. This set up the primary tension of the season, which could only be resolved by either Sal disappearing with the FBI's help or, more likely, meeting a tragic end.
Tony already knew that Sal was an informant before his fever dream in "Funhouse" — so why did The Godfather.
The fever dream scene between Tony and Pussy (the fish) added excitement to a reveal that the audience already knew; the suspense in season 2 wasn't that Tony would find out about Pussy — it came down to when he'd be forced to confront the truth. The moment is genuinely unsettling and difficult to forget. It's one of several examples of animals being used symbolically to represent Tony's inner feelings, but this instance is one of the most disturbing. Chase is a fan of dream imagery (hence why it is used throughout The Sopranos), which, as a plot device, allows one to communicate several ideas by layering symbols: the fish obviously represents Sal, but it also represents both his past and his future. As a fish, he has a "big mouth" (i.e. shared information he shouldn't have) — as someone who betrayed Tony, he's "dead meat." His statement, "these guys, on either side of me? They're asleep," is an obvious reference to the famous "sleeping with the fishes" idiom, which foreshadows his death at the episode's end.
The sleeping with the fishes line may be a gangster cliche, but it actually originated from The Godfather. Chase loved to sneak in The Sopranos, so it's fitting that such a significant death at this point in the series was tied to arguably the most culturally significant mafia movie of all time. The fish motif predates this scene and continues after it; in the season 1 finale, Chucky Signore is filled by a gun pulled from a fish. In season 3, episode 10, Tony is horrified by the Big Mouth Billy Bass Meadow gives him for Christmas because it reminds him of Pussy. In that same episode, Sal (in a flashback) tells Tony "I always wanted a house by the ocean. Maybe in another life." In Tony's dream, his wish is granted — perhaps indicating Tony's conflicting desires: Tony's obviously hurt by the betrayal, but he loves Pussy as a brother all the same. The fever dream haunts Tony in The Sopranos — and sticks with the viewer as well.