What is an overlay network and why does it matter for clustering?

An overlay network uses VXLAN encapsulation to create a virtual Layer 2 network spanning multiple physical or virtual hosts, so containers on different machines can communicate as if they were on the same LAN. This underlies Docker Swarm's multi-host service discovery and load balancing, and is conceptually the same problem that Kubernetes CNI plugins (Calico, Flannel, Cilium) solve for pod-to-pod networking across nodes.