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By Alyssa Newcomb

The line between virtual reality and the real world has been blurred even more with Intel's Project Alloy, a headset that marries the two to allow users to invent their world.

Intel CEO Brian Krzanich showed off the headset Tuesday at the start of the Intel Developer Forum in San Francisco.

"Merged reality will be one of those fundamental shifts that is going to redefine how we work, how we are entertained and how we communicate," Krzanich said.

Intel's RealSense technology is built into the all-in-one headset, allowing it to recognize where a person is at all times and what they're doing with their hands, which can act as controllers.

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A demonstration onstage at the Moscone Center showed how a user could move around their home, unencumbered by a cord and dodging any obstacles in their way.

"It doesn't feel very virtual when you're tied to a confined space," Krzanich said.

Intel's Craig Raymond displays the Project Alloy virtual reality headset during the Day 1 keynote at the 2016 Intel Developer Forum in San Francisco on Aug. 16, 2016.Intel Corporation

The merged reality concept was demonstrated with the person using a physical dollar bill to carve a virtual piece of gold spinning on a virtual pottery wheel.

"Gaming is going to be amazing. Imagine you could turn your entire house into a level of a game, and you're not walking into walls because you have a camera element to it and you're actually using your hands not a VR controller," Patrick Moorhead, an analyst at Moor Insights & Strategy told NBC News at the event.

Project Alloy will be open source, allowing developers to first get their hands on the technology and create new experiences.

Terry Myerson, executive vice president of Microsoft's Windows and Devices group, joined Krzanich onstage to announce Project Alloy will run on Windows Holographic, Microsoft's platform for its HoloLens mixed reality eyewear.

Myerson said Windows Holographic would be released to mainstream Windows 10 devices next year. Myerson said the experience will bring a new experience for multitasking in mixed reality.