Efficient traffic forwarding between virtual machines

A computer system, comprising:

• a processor;
• and
• a memory coupled to the processor and storing instructions, which when executed by the processor cause the processor to perform a method, the method comprising:
• obtaining, by a hypervisor, a layer-2 packet from a first virtual machine (VM) running on the hypervisor;
• determining, by the hypervisor, that a destination media access control (MAC) address in a first layer-2 header of the layer-2 packet is allocated to a second VM running on a remote hypervisor;
• decapsulating, by the hypervisor, the first layer-2 header to obtain an inner layer-3 packet;
• obtaining, by the hypervisor, a virtual local area network (VLAN) identifier of a transit VLAN (TVLAN) from a mapping between the VLAN identifier and a distributed virtual routing (DVR) identifier of a DVR instance operating on the hypervisor and the remote hypervisor, wherein the TVLAN is dedicated for inter-VM traffic of a plurality of VLANs associated with the DVR instance, and wherein a respective DVR instance facilitates a routing for a corresponding tenant;
• encapsulating, by the hypervisor, the inner layer-3 packet with a second layer-2 header comprising the VLAN identifier of the TVLAN to generate an updated layer-2 packet;
• setting a first MAC address of the hypervisor as a source MAC address and a second MAC address of the remote hypervisor as a destination MAC address in the second layer-2 header;
• and
• determining an egress port corresponding to the remote hypervisor for the updated layer-2 packet based on the second MAC address in the second layer-2 header.