Xen is a virtual machine monitor that allows multiple guest operating systems to run simultaneously on the same computer hardware. It uses paravirtualization, where the guest operating systems are modified to interface with the hypervisor rather than directly with hardware. This allows Xen to provide isolation between guest virtual machines while maintaining high performance. Xen introduces a new privileged level, where the hypervisor runs at a higher privilege than the guest operating systems. This allows Xen to maintain control over CPU, memory, and I/O access between virtual machines.