Pokémon can't really be "Pocket Monsters" unless they can fit into your pocket. Enter the Pokéball, a convenient invention that can contain any Pokémon, regardless of size, within it. There are various iterations of the Pokéball, and it's possible to create them from nuts and other organic material. Still, what actually happens inside the Pokéball remains a mystery.
There are numerous theories as to what happens inside a Pokéball. Through the scant official data available from interviews and in-game information, we can deduce what the environment inside a Pokéball is like -- and what this all means in the Pokémon World.
What's It Like Inside a Pokéball?
Little is actually known about Pokéballs. When the ball hits a Pokémon, they are converted into a form of energy, and the creatures are swiftly trapped inside of it -- at least, that's the case in the anime. In the games, Pokémon visibly shrink into the balls. Either way, they are sucked inside the ball. All of this indicates that the ball is able to somehow convert the alter the properties of the creatures to ensure they fit inside. In the Pokémon anime -- which will soon have a new protagonist -- there's nothing inside the ball but its mechanical insides, and creatures are rarely shown inside Pokéballs (in one episode, Misty's Psyduck captures himself inside one of her Pokéballs, though that might only be a stylistic representation of what can happen in there).
What is known for sure is that Pokémon are converted into energy and contained inside the ball. The Pokémon world has proved it can turn physical matter into energy for transportation, as seen with both the Pokémon Transfer System, how Pokéballs materialize in a player's Box when they have over six Pokémon on their person, and how the psychic move "Teleport" affects Pokémon. Thus, Pokémon are seemingly turned into energy inside the Pokéball, rather than physically shrunk down to size.
It's Very Comfortable Inside a Pokéball – Supposedly
While little has been said officially about what Pokéballs are like on the inside, there are some tidbits of information available on the topic. Most notably, Pokémon Sun and Moon producer Junichi Masuda explained in an interview what he felt the inside of a Pokéball was like: "I think it’s safe to say that it’s very comfortable inside of a Pokeball, it’s a very comfortable environment. Maybe the equivalent of a high-end suite room in a fancy hotel."
This seems to indicate that the space inside a Pokéball is artificially generated to be appealing to each Pokémon. Therefore, within the Pokéball, there's essentially a virtual reality created for the Pokémon, designed as a perfect environment for the given species. These ecosystems are designed for comfort, creating a perfect, private space for its inhabitants.
That doesn't mean every Pokémon will like that environment. Ash's Pikachu and the one in Pokémon Yellow hate being contained in a Pokéball, and many Pokémon in-game seem eager to be outside the container so they can interact with human beings. Because Pokéballs are designed to create a comfortable environment, it seems Pokémon like Pikachu hate being inside a Pokéball because of how isolating they are. It is unknown if the Pokémon can interact with other Pokémon contained inside Pokéballs, though there are spaces like the PokéPelago for PC-bound Pokémon. On top of that, both in the games and anime, trainers regularly let their creatures interact with one another outside of the Pokéballs, as seen in Pokémon Sword and Shield's Pokémon Camp feature, where Pokémon freely walk around and have fun with one another.
So, we can assume that, while Pokéballs aren't uncomfortable, they're not exactly meant for long-term containment.