Two of the three major technologies we talk about here have the word reality in the name, and when you see the shortened version of these names it's even easier to get confused about the purpose of these two things. We frequently see "Is there a difference between VR and AR?" or "Can my VR headset use AR apps?" when doing Q&A sessions, and for good reason. The line between the way these two technologies gets used is blurry. Both can be used for games, both can be used in professional settings, and both can be headsets worn for extended periods of time.
The big difference between Virtual Reality and Augmented Reality is one you can see with your eyes, and that makes it very easy to explain.
Put simply, VR refers to any technology that completely replaces what your eyes can see with something else. As you move your head, the image moves just as it should in real life, but the images you see are very different from the world around you. This is great for gaming or storytelling as it allows the viewer to full immerse themselves in what is happening around them, but it does also mean there's some disconnect when you accidentally bump into something in the real world.
Virtual Reality frequently requires something to cover both of your eyes, and current technology uses displays and lenses that do not stretch the replacement image over your entire field of view. In most cases you see the edge of the display, which can frequently but briefly break the illusion of this alternate reality. VR also has a failure risk that is important to keep in mind. When your brain no longer feels the virtual world you are seeing is "real" enough compared to the motion your body is making, cue correction from the brain can quickly lead to nausea. It's great as long as everything is working as intended, but failure in VR often means confusion and disorientation for the user.
When you see something in AR, you see something virtual positioned in the real world. This means the display you are using is showing you the physical world around you with virtual things added in. This can be as simple as a map marker through the camera interface on a phone to show you what direction to head in, or a full headset that virtually adds videos or games to the real world. More complex AR systems allow you to treat the walls in your home as though they are apps on a computer screen, or send virtual robots to come shoot at you as you duck safely behind your couch. It's a blending — or augmenting — of the reality you already live in.
Most forms of AR that we see today live on phones, driven by QR codes to place virtual objects where the camera can see. More complex systems like Google Tango and Microsoft Hololens use an array of cameras to make the computer aware of the position in the room, allowing the user to walk around the virtual objects and inspect them as though they were actually in the room. Augmented Reality typically does not completely fill your vision, so the additions to reality you see are often only visible when looking straight ahead of you.
What is XR? Is that something different?
Yes and no. The truth is, there's a lot about current Virtual Reality and Augmented Reality devices that blur the lines quite a bit. If you wear a Samsung Gear VR but are using the passthrough camera for something in the real world, you're using Augmented Reality in a Virtual reality headset. If you enable the World View app on Hololens, you're having a Virtual Reality experience in an Augmented Reality headset. It gets confusing, which is why there is currently an effort to standardize all of these technologies under the more encompassing XR, for Extended Reality.
XR as a concept seeks to treat all of these amazing reality-bending experiences as a spectrum, since it's becoming increasingly clear the number of truly single-purpose devices aren't going to be increasing over time. When we think about things like Pokemon Go, Microsoft Hololens, and Oculus Rift all existing as part of the same category of experiences, it starts to be a little easier to understand.
It's not common for much of anything to be called an XR device right now, or maybe ever, but it's a conversation being had in the community. If you hear the term used in passing, this is what is being discussed.
Is one better than the other?
No, but there are situations where one can be more appropriate. VR, for example, is terrific for gaming and watching video. Being able to fully immerse yourself is incredible, and nearly all of the experiences being created for Oculus Rift and HTC Vive wouldn't feel the same in AR. At the same time, being able to see the desk in front of you, the keyboard in mouse in front of you, or even both hands buried in the engine in front of you, are things that make AR stand out. The ability to interact with the physical world while seeing elements of the virtual world is fantastic for productivity and some forms of entertainment, and long term could be a default for how we interact with all kinds of computer interfaces.
In the short term, there aren't many headsets that offer both AR and VR functionality. It's possible the Samsung Gear VR and HTC Vive, which both have cameras on the front of the headsets, could be improved to allow for dynamic switching between AR and VR apps, but currently those use cases are not the dominant options for these VR headsets.