The cause of narcolepsy was quite mysterious until a new neurotransmitter, orexin (also called hypocretin) was discovered in 1998. The orexin neurons are found in the lateral hypothalamic area. They target the main components of the ascending arousal system, and both of the orexin receptors are excitatory. Orexin neurons fire most rapidly during wakefulness, particularly during wakeful exploration of the environment. Thus the orexin neurons appear to play a key role in maintaining and stabilizing a wakeful state.

Soon after their discovery, it became apparent that gene defects that cause loss of signaling by the orexin neurons could cause narcolepsy in experimental animals. In humans, however, genetic mutations are a rare cause of narcolepsy; most individuals with narcolepsy appear to have loss of their orexin neurons, perhaps due to autoimmune attack.

The orexin neurons stabilize the behavioral state by reinforcing wakefulness and blocking individuals from falling directly from wakefulness into REM sleep. In the absence of the orexin neurons, the waking state is less stable, and individuals fall asleep too easily. They also enter REM sleep very quickly after sleep onset and can have fragments of REM sleep (dreaming, muscle atonia) occurring at the wrong times, accounting for the episodes of hypnagogic hallucinations, sleep paralysis, and cataplexy.

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