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Fahmi Rizwansyah says:

Following are some (possibly overlapping) representative reasons for and benefits of virtualization.

* Virtual machines can be used to consolidate the workloads of several under-utilized servers to fewer machines, perhaps a single machine (server consolidation). Related benefits (perceived or real, but often cited by vendors) are savings on hardware, environmental costs, management, and administration of the server infrastructure.
* The need to run legacy applications is served well by virtual machines. A legacy application might simply not run on newer hardware and/or operating systems. Even if it does, if may under-utilize the server, so as above, it makes sense to consolidate several applications. This may be difficult without virtualization as such applications are usually not written to co-exist within a single execution environment (consider applications with hard-coded System V IPC keys, as a trivial example).
* Virtual machines can be used to provide secure, isolated sandboxes for running untrusted applications. You could even create such an execution environment dynamically - on the fly - as you download something from the Internet and run it. You can think of creative schemes, such as those involving address obfuscation. Virtualization is an important concept in building secure computing platforms.
* Virtual machines can be used to create operating systems, or execution environments with resource limits, and given the right schedulers, resource guarantees. Partitioning usually goes hand-in-hand with quality of service in the creation of QoS-enabled operating systems.
* Virtual machines can provide the illusion of hardware, or hardware configuration that you do not have (such as SCSI devices, multiple processors, ...) Virtualization can also be used to simulate networks of independent computers.
* Virtual machines can be used to run multiple operating systems simultaneously: different versions, or even entirely different systems, which can be on hot standby. Some such systems may be hard or impossible to run on newer real hardware.
* Virtual machines allow for powerful debugging and performance monitoring. You can put such tools in the virtual machine monitor, for example. Operating systems can be debugged without losing productivity, or setting up more complicated debugging scenarios.
* Virtual machines can isolate what they run, so they provide fault and error containment. You can inject faults proactively into software to study its subsequent behavior.
* Virtual machines make software easier to migrate, thus aiding application and system mobility.
* You can treat application suites as appliances by "packaging" and running each in a virtual machine.
* Virtual machines are great tools for research and academic experiments. Since they provide isolation, they are safer to work with. They encapsulate the entire state of a running system: you can save the state, examine it, modify it, reload it, and so on. The state also provides an abstraction of the workload being run.
* Virtualization can enable existing operating systems to run on shared memory multiprocessors.
* Virtual machines can be used to create arbitrary test scenarios, and can lead to some very imaginative, effective quality assurance.
* Virtualization can be used to retrofit new features in existing operating systems without "too much" work.
* Virtualization can make tasks such as system migration, backup, and recovery easier and more manageable.
* Virtualization can be an effective means of providing binary compatibility.
* Virtualization on commodity hardware has been popular in co-located hosting. Many of the above benefits make such hosting secure, cost-effective, and appealing in general.
* Virtualization is fun.
* Plenty of other reasons ...

Generically speaking, in order to virtualize, you would use a layer of software that provides the illusion of a "real" machine to multiple instances of "virtual machines". This layer is traditionally called the Virtual Machine Monitor (VMM).

There are many (often intertwined) high-level ways to think about a virtualization system's architecture. Consider some scenarios:
A VMM could itself run directly on the real hardware - without requiring a "host" operating system. In this case, the VMM is the (minimal) OS.

A VMM could be hosted, and would run entirely as an application on top of a host operating system. It would use the host OS API to do everything. Furthermore, depending on whether the host and the virtual machine's architectures are identical or not, instruction set emulation may be involved.
From the point of view of how (and where) instructions get executed: you can handle all instructions that execute on a virtual machine in software; you can execute most of the instructions (maybe even some privileged instructions) directly on the real processor, with certain instructions handled in software; you can handle all privileged instructions in software ...
A different approach, with rather different goals, is that of complete machine simulation. SimOS and Simics, as discussed later, are examples of this approach.
Although architectures have been designed explicitly with virtualizationWhy Virtualization in mind, a typical hardware platform, and a typical operating system, both are not very conducive to virtualization.

As mentioned above, many architectures have privileged and non-privileged instructions. Assuming the programs you want to run on the various virtual machines on a system are all native to the architecture (in other words, it would not necessitate emulation of the instruction set). Thus, the virtual machine can be run in non-privileged mode. One would imagine that non-privileged instructions can be directly executed (without involving the VMM), and since the privileged instructions would cause a trap (since they are being executed in non-privileged mode), they can be "caught" by the VMM, and appropriate action can be taken (they can be simulated by the VMM in software, say). Problems arise from the fact that there may be instructions that are non-privileged, but their behavior depends on the processor mode - these instructions are sensitive, but they do not cause traps.

Cheers, frizzy.