What is an observer, and does it have to be conscious?

No, it does not have to be conscious. An observer is anything that implements the observer interface, an algebraic description of what it takes to see part of the world, write the reading into a record that holds, and consult that record so it changes what comes next. The observers that generate the laws of physics are very simple. They are called native observers, and each runs the same fixed rule, so in the everyday sense they are dumb. Their consensus process produces the physical layer: space, time, particles and, in the end, molecules. More complex observers evolve on top of that layer, built from those molecules, and some of them, like us, are conscious. Consciousness is a late special case. It adds no new ingredient to the interface and needs a richer organization of it. OPH reads experience as repair at an observer's own boundary, read from the inside, and reality as a whole is conscious only through its observers.

Also in Appendix A: Eighteen Questions.