This hands-on example discusses why and how to use a loopback interface as a local tunnel endpoint (TLOC). There are many scenarios where this design option comes in handy.
Why do we need Loopback TLOCs?
Every TLOC interface has a property that often goes untold – it also acts as a boundary. It only accepts IPsec traffic that is addressed to itself and comes from known peers (other remote TLOCs). In other words, an interface that is configured as a local TLOC does not behave like a normal layer 3 interface. It does not allow passthrough traffic, as shown in the diagram below. It acts as boundary between the underlay and the overlay.
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