B (Encapsulation at source and destination):Overlay networks encapsulate payloads inside another protocol (e.g. VXLAN, GRE, MPLS), adding headers that enable separation from the underlay network while introducing minor overhead due to encapsulation.
Other options explained:
A: Describes underlay behavior.
C: Overlay encapsulation occurs independently of L3/L4 reliability.
D: NAT or VRF are isolation mechanisms but not how overlays function.
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