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!"
Usually viewed as an indication of Sexual Frustration. Affected persons will be seen trying to remove the label from a beer, pop, or juice bottle. Some will play it off as simply boredom, or high anxiety. In some cases, may be remedied by removing said label and presenting it to a person of your choosing, if they accept your label then you could be getting some.