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A differencing disk is a type of virtual hard disk (VHD) that stores and manages changes made to another VHD or its parent VHD.
It is used in virtual environments to track, store, manage and restore only the changes or modifications applied on a VHD.
Techopedia Explains Differencing Disk
A differencing disk is used primarily as a means to record and undo changes made to a VHD. It is similar to an Undo Disk, but is only associated with a single VHD. It only stores the change performed on a VHD, thus it cannot be used as a backup disk. It works when an already created VHD is assigned with a differencing disk. This way the VHD serves as the parent disk and the differencing disk as the child disk. The data stored on a differencing disk can be merged with the parent, or on an entirely new VHD.
Besides VHD, a differencing disk can also be used with guest operating systems in storing and restoring changes made to the OS.
