Some hypervisors offer features that aim to reduce the amount of physical memory needed in a virtual environment's host servers. Memory is still one of the most expensive components of a physical server, not so much because of the cost per GB but because of the number of GBs that modern software requires in servers.
It's not surprising therefore that virtualization technologies have tried to ease the cost of servers by making what memory is installed in the server go farther. However, there is no such thing as free memory; and any method used to make memory go farther will affect performance somewhere. The goal is to know where that performance impact can occur with the least noticeable effects.
Demand-based memory allocation works on the assumption that not all the virtual servers running on a host server will need all their assigned memory all the time. For example, my laptop has 4GB of memory but 2.9GB of it is currently free. Therefore, if it were a virtual server, the hypervisor could get away with granting me only 1.1GB, with the potential for up to 4GB when I need it. Scale that out across a host server running 20 virtual servers and the potential to find allocated but un-required memory could be huge.
The preceding scenario is the basis of demand-based memory allocation features in modern hypervisors. While VMware and Hyper-V have different approaches, their ultimate aim is the same: to provide virtual servers with as much memory as they need but no more than they need. That way, unused memory can be allocated to extra virtual servers that wouldn't otherwise be able to run at all because of memory constraints.
In an ideal situation, if several virtual servers all request additional memory at the same time, the host server would have enough free physical memory to give them each all they need. If there's not enough, however, then the hypervisor can step in to reclaim and re-distribute memory between virtual servers. It may be, for example, that some have been configured to have a higher priority than others over memory in times of shortages; this is called weighting and is described in the next section. The rules about how much memory you can over-provision vary by hypervisor, but the need to reclaim and re-distribute memory is certainly something VMware's software and Microsoft's Hyper-V could have to do.
Re-claiming and re-distributing memory ultimately means taking it away from one virtual server to give to another, and from a virtual server that was operating as though the memory allocated to it was all theirs, and it may well have been being used by applications. When this reclamation has to happen, a SQL Server DBA's worst nightmare occurs, and the balloon driver we mentioned earlier has to inflate.
The purpose of a balloon driver is that when more memory is required than is available in the host server, the hypervisor will have to re-allocate physical memory between virtual servers. It could do this to ensure that any virtual servers that are about to be started have the configured minimum amount of memory allocated to them, or if any resource allocation weightings between virtual servers need to be maintained, for example, if a virtual server with a high weighting needs more memory.
Different hypervisors employ slightly different methods of using a balloon driver, but the key point for DBAs here is that SQL Server always responds to a low Available Megabytes value, which the inflating of a balloon driver can cause. SQL Server's response to this low-memory condition is to begin reducing the size of the buffer pool and release memory back to Windows, which after a while will have a noticeable effect on database server performance.
The advice from the virtualization vendors about how to configure their demand-based memory allocation technology for SQL Server varies. Hyper-V is designed to be cautious with memory allocations and will not allow the minimum amount of memory a virtual server needs to become unavailable, while VMware allows the memory in a host server to be over-committed. Because of the potential performance issues this can cause, VMware does not recommend running SQL Server on a host that's had its memory over-committed.