It takes Papyrus a moment to recognize Steven, certainly - from the very first time they met, Steven's been a bit buggy. But this dream pushed Papyrus to a full turnskin, heightened senses and all, and an illusion focused on the visual doesn't necessarily cover the full scent range.

"I don't understand," Papyrus complains, half-heartedly with a suspicion that maybe he understands more than he likes. "I'm not scary, but they seem almost... scared of me?"

A ridiculous thing, surely. Just look how soft, fluffy, and huggable he is. Never mind the impression of being a zombie, with gaps in fur coverage revealing bones.