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in the olden days, VPS providers worth their salt ran freebsd and had each tenant inside a jail.

This was back in the early 2000's, and still seems to work rather well for the basic webhosting.

Why not use a 'proper' VM system like xen?

Xen only hit v1 in 2004 and was relatively niche.

Lower overhead, both from a system and an administrator perspective.