Cloud Servers employ a technology known as virtualization: a technique whereby a physical server is divided into virtual divisions (sometimes called "containers" or "virtual environments"), which make it appear as if your site is running on a dedicated server.
There are three major types of virtualization being used by most hosting providers today. OpenVZ, Xen and KVM.
OpenVZ (Open Virtuozzo) is an operating system-level virtualization technology based on the Linux kernel and operating system. OpenVZ allows a physical server to run multiple isolated operating system instances, called containers, virtual private servers (VPSs), or virtual environments (VEs).
OpenVZ is not true virtualization but really containerization. OpenVZ uses a single patched Linux kernel and therefore can run only Linux, all containers share the same architecture and kernel version. However, as it does not have the overhead of a true hypervisor, it is very fast and efficient. The disadvantage with this approach is the single kernel. All guests must function with the same kernel version that the host uses.
Xen is a bare metal hypervisor, which makes it capable of running multiple instances of virtual machines on a single host. These hosts are not constrained to the kernel of the host and for that matter do not even have to run Linux in the VPS. Xen Virtualization is capable of hosting Windows and BSD operating systems as seamlessly as a Linux guest. Additionally Xen is a very light hypervisor with a small foot print. This leave the valuable resources you need where you need it, for the guest virtual machines.
Another great benefit from a consumer perspective is that Xen cannot be over-subscribed. Each guest's resources are allocated all the time on the host node. No sharing memory and hoping some is there when you need it! Xen supports both Hardware Virtual Machine (HVM) and Paravirtualization (PV) in the hypervisor
KVM represents a full hardware virtualisation platform with loadable kernel modules, giving users the freedom to run a range of Linux distros with any kernel. Each virtual machine has private virtualised hardware including network card, disk and graphics adapter, and with no possibility of overselling, you get guaranteed resources at your disposal any time day or night!
KVM In my opinion is the up and comer in the Virtualization world. It is back by Redhat and they have removed support for Xen by default on Enterprise Linux 6, in favor of KVM. It has a lot of features and is similar in certain ways to Xen, as in it supports Paravirtualization via the VirtIO framework.
Our cloud servers are based on KVM virtualization