This refers to the mental status of a person. The brain is the onion, and layers are the functions processed by the brain. As a person's mental status changes (ex. as they become intoxicated) they are peeling layers that control functions of the brain. The outer layers are the highest functions, and the first to go.
"So I heard last night was a blast"
"Yeah everyone was peeling layers of the onion, I dont think anyone could talk by the end!"
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