Stretching Local Networks Across the Cloud
Virtual Extensible LANs allow data centers to break free from traditional limits. By wrapping network traffic inside common internet protocols, they let thousands of virtual networks coexist on the same physical infrastructure.
Imagine trying to fit millions of devices into a network designed for only a few thousand; that is the challenge cloud providers face daily. VXLAN solves this by tunneling Ethernet frames inside UDP packets, essentially fooling the network into thinking everything is connected locally. This ingenious trick allows virtual machines to move across physical servers without losing their identity. It is the secret foundation that makes modern, massive-scale cloud computing possible.
Source: Virtual Extensible LAN