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Comments
Openfire.
you might be able to get away with openfire on 128mb
https://prosody.im/
Prosody
I've run prosody on a 256MB KVM before (just a few users). If you need more than a few users, I'd suggest you do some testing to estimate average memory use per logged in user and do the math...
Openfire needs Java so I guess it will be very difficult to run it with 128 MB.
Absolutely try Prosody.