Amazon has been using electronic paper technology for several years now in its popular line of Kindle e-readers. Invented in 1973 by Nicholas K. Sheridon from Xerox (see our extensive interview), e-paper was  developed in recent years by E Ink Corporation which sells its products to several manufacturers worldwide including Amazon.
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The basic technology produced by E-Ink and used by Amazon and other manufacturers is known as Electrophoretic frontplane and it consists of millions of tiny microcapsules, each approximately 100 microns in diameter—about as wide as a human hair. Each microcapsule is filled with a clear fluid containing positively charged white particles and negatively charged black particles. When a negative electric field is applied, the white particles move to the top of the microcapsule, causing the area to appear to the viewer as a white dot, while the black particles move to the bottom of the capsule and are thus hidden from view. When a positive electric field is applied, the black particles migrate to the top and the white particles move to the bottom, generating black text or a picture. 
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This creates a text which resembles many of the characteristics of normal paper and differs from LCD displays which requires back lighting to produce a visible image. Amazon's latest addition to the basic E-Ink technology adds lighting - but unlike the back lighting of LCD which uses backlight aimed directly at yours eyes (causing eye strain), Amazon's Paperwhitetechnology uses type of fiber-optic layer on top of the e-paper display with very high quality LED lights which shines light uniformly across the screen. The light shines from the top down (rather the other way around which happens in an LCD for instance).

The result is a is a device which can operate at very bright or dark environment with very high contrast levels. The Amazon's Paperwhite technology took 8 years to develop and the device itself which should hit stores soon also includes several other improvements to the existing Kindle such as (according to Amazon):  
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A video by Amazon talking about the Paperwhite technology

The Kindle Paperwhite will come in two versions - one with only WIFI for $119 and the other with 3G support for $179. More information can be found on the Amazon website.