Think of the matrix as an onion with many layers. You first start out in the center. If you're not able to cope with the virtual world that exist in that layer. The matirx will then have you moved to a different virtual world. But you are not moved phyically only mentally. The matrix will make it appear you escaped the layer you were in, before assigning you to the new layer.
When they speak of Zion being distroyed with each cycle. I believe it means the people of zion are returned to the interlayer of the matrix after their minds have been reset. The spoiler says the machines figure a way to extract the consciousness of the people, which eliminates the need to have a body in a pod.
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