While positive emotion can be conceptualized broadly as a response to the potential for reward, the environment offers different kinds of rewards, and these are best approached in somewhat different ways. A functional approach to positive emotion differentiation distinguishes among several different types of rewards with strong implications for adaptive fitness and posits the existence of “discrete” positive emotions that promote an adaptive response to each reward. A taxonomy of eight positive emotions, dubbed the “PANACEAS” taxonomy based on an acronym of the first letter of each of the eight constructs, is presented as an example of this approach. Positive emotion constructs defined through functional analyses are useful for guiding empirical research, especially for identifying prototypical eliciting stimuli, and generating hypotheses about the implications of different positive emotions for a variety of outcomes. Research findings are reviewed that support the importance of positive emotion differentiation in understanding the effects of positive emotions on cognition, physiology, and behavior. Advantages of the functional approach are discussed, as well as implications of the approach for evaluating major theories of the structure of emotion.