Nested virtualization refers to virtualization that runs inside an already virtualized environment. In other words, it's the ability to run a hypervisor inside of a virtual machine (VM), which itself runs on a hypervisor.
With nested virtualization, you're effectively nesting a hypervisor within a hypervisor. The hypervisor running the main virtual machine is considered a level 0, or LO hypervisor, and the initial hypervisor running inside the virtual machine is referred to as a level 1 or L1 hypervisor. Further nested virtualization would result in a level 2 (L2) hypervisor inside the nested VM, then a level 3 (L3) hypervisor within that nested VM, and so forth.
Which Hypervisors Support Nested Virtualization and Use Cases for Nested Virtualization
Not all hypervisors and operating systems support nested virtualization. Hypervisors that do support nested virtualization include KVM and VMware ESXi hypervisors (called Nested ESXi). Nested ESXi also supports Hyper-V, Xen and KVM guest hypervisors as of ESXi version 6.0.
Nested virtualization can be used for development and testing purposes, virtualization training, providing guest virtualization to end users, deployment testing of "virtual clouds," testing configurations and other cases where running multiple hypervisors on the same host server might be needed.
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