NSX primarily using overlay networking with the use of the VXLAN protocol and centralized network configuration. Overlay
networking
enables the following capabilities:
1)Creation of a flexible logical layer 2 (L2) overlay over existing IP networks on existing physical infrastructure
without the need to re-architect any of the data center networks
2)Agile provision of communication (east–west and north–south) while maintaining isolation between tenants
3)Application workloads and virtual machines that are agnostic of the overlay network and operate as if they
were connected to a physical L2 network
I would suggest you to read https://www.vmware.com/files/pdf/products/nsx/vmw-nsx-network-virtualization-design-guide.pdf
(page 11)