A virtual honeypot is software that emulates a vulnerable system or network to attract intruders and study their behavior.
Honeypot owners can gather information about intruders and their actions that can help identify network vulnerabilities and take actions to protect weak points. The information can also be used to determine what IP addresses and requests should be blocked. Attacker information can also be turned over to the authorities.
Virtual honeypots contrast with hardware-based honeypots, which are dedicated computers, networks or network segments designed to serve the same purpose. Virtual honeypots can be thought of as virtual machines (VMs) which may exist in multiple configurations on a single computer or appliance to emulate various systems and vulnerabilities.
Virtual honeypots are cheaper to deploy and more secure than hardware-based systems. In some cases, for example, real honeypots have been infiltrated by intruders who were able to use them to attack the corporate network. However, because a virtual honeypot is an emulator, it doesn't function exactly as a real system does and hackers may be able to pick up on cues that indicate the difference.
See a video introduction to using honeyd virtual honeypot software: