A digital twin is a virtual representation of a real system. It is cloud based and operates on the data that was retrieved from the real-system. It is closely related to IoT as shown in the next figure The real system comprises an asset that is steered by a control computer. The sensor and actuator data are collected in the control computer and sent over a gateway for storage in the cloud (backend). In the cloud we can monitor the data directly (plots, graphs, trends,...) or bring the system to life by using AR/VR.
Using AR/VR to represent the real-machine is much closer to the human experience than numbers or plots. The movie below gives a demonstration showing a real robot in action and its VR representation from cloud data.