VxLAN or Virtual Extensible Local Area Network. Essentially, it can be said to be extension of vlan numbers, which are limited to 4096, to about 16 million. But VxLAN offers much more than this. To understand it better, lets go back to start. i.e. LAN. LAN is Local Area Network. A network that is limited to a room, or a building or where switch ports can be extended. Switches in LAN will be under same broadcast domain. Of course this is not a best solution for ever expanding network.
Then someone thought of virtualization of it, and termed it as VLAN or Virtual LAN. With this the switch can have multiple LANs and separate broadcast domains of each LAN. Two LANs are segregated from each other with its id/number. There is a limit to VLAN numbers and its 2^12 which is 4096. This solved the problem, but as DC network grew more and more, 4096 started looking a very small number. Think of it, one esxi host cluster can have 512 VMs. and if you're talking of 10 clusters and this outnumbers the available VLANs.
Clearly there was a need of expanding it, and as it is said, that necessity is the birth of invention, VxLAN was born. A VxLAN can support upto 16million number/id. So this solution is future proof, at-least for coming years.
How it works is pretty simple and similar to GRE:
Take the L2 frame, encap it with a VNID, VTEPs(more on these...) MAC and IP info and send it across a L3 underlay over UDP port.
To be continued...