An Overlay Network, is an network that is effectively built on top of another network and uses the base networks infrastructure to operate. Examples of overlay networks include Virtual Private Networks, Peer to Peer Networks, Content Delivery Networks and Voice over IP services. An Overlay Network encapsulates packets inside other packets to allow forwarding of data from the underlying network.
The network overlay will provide additional security benefits to the original network, however setbacks include slow data spread, long latency and duplication of packets. Originally the internet was considered an overlay network as it was built on top of the telephone network.
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