The whole egg laying process is literally just a way to delete all the process you made up to that point and gain the powers of a literal fucking newborn.

First you need to have 14 tails, then you wiggle yourself and lay an egg, which removes about 2 tails, then you wait 5-8 seconds and the egg hatches, what do you get from the egg? You get a surprise, the relatively big worm you were controlling is now an AI, and you get to play as the newborn, erasing all of the progress you had achieved in that level, and making you weaker than a ladybug.

Yes it's downgrade mode of egg laying. :) In the level "Genealogy" in single campaign it  just a quest. In splitscreen level "Eggforia" two players compete for who lay more eggs. Egg downgrade is balance feature in this case — to win, each player must go to his strong and weak stage. Insatia's grow mechanic not balanced relative clash of different sized creatures: big worm always stronger and quickier than small worm. Eggs is way to little balance it in critical cases.

But reborn downgrade scheme is not a single way for using eggs. Egg's mechanic is context related, there are 3 modes that level creator can switch in scripts:

1. Player switched to new hatched baby worm.

2. Hatched worm became teammate of parent worm (he borns with the same team color).

3. Layed egg grow to maximum size and keep this stage waiting for player death. It works like a save point - it will hatch new creature for player when he died.

All three ways used in single campaign (but in demo there is only first of them).