Unlike the similar Xnest, Xephyr supports modern X extensions (even if host server doesn't) such as composite, damage, randr, etc. It uses SHM images and shadow framebuffer updates to provide good performance. It also has a visual debugging mode for observing screen updates.
Xephyr doesn't pick up the correct keyboard configuration from evdev-based keyboard drivers, so users must configure Xephyr's keyboard layout manually when using such keyboard drivers.
Xorg's version of Xephyr only supports software rendering for OpenGL, but Feng Haitao has developed a forked version of Xephyr which supports hardware-accelerated rendering if the underlying X server supports it.
See also 
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