An overlay network is a virtual network that is built on top of an existing physical network infrastructure. It creates a layer of network abstraction by encapsulating packets at the source and destination endpoints. This encapsulation adds an additional overhead to the packets as they traverse the underlying physical network. The overlay network allows for logical isolation and segmentation of network traffic, enabling the implementation of virtual networks with specific characteristics and policies.
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Devices on overlay networks are interconnected through logical links, constituting overlay topologies.
Tunnels are established between interconnected overlay devices. When sending a data packet, a device adds a new IP header and a tunnel header to the data packet and shields the inner IP header. The data packet is then forwarded based on the new IP header. When the data packet is received by another device, the device removes the outer IP header and tunnel header to obtain the original data packet. In this process, overlay network devices are unaware of the underlay network.
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https://www.sdxcentral.com/networking/sdn/definitions/whats-network-virtualization/what-is-overlay-networking/
"Most forms of overlay networking use some sort of encapsulation”
"One criticism of overlay networking is that it can create performance overhead by adding more layers of software and processing."
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