What exactly is a Micronation?

Basically a Micronation is a government set up by an average Joe like you or me for various purposes, mostly as a hobby. The micronations interact with each other and act much like official nations, they engage in war, diplomacy, and other things that governments do.

Micronations generally have a number of common features:

1. Micronations may have a form and structure similar to established sovereign states, including territorial claims, government institutions, official symbols and citizens, albeit on a much smaller scale.
2. Micronations are often quite small, in both their claimed territory and claimed populations — although there are some exceptions to this rule, with different micronations having different methods of citizenship.
3. Micronations may issue formal instruments such as postage stamps, coins, banknotes and passports, and confer honours and titles of nobility.

http://micronations.wikia.com/wiki/Micronation