The whole idea rests on the belief that tunneling your traffic across a virtual network built on top of the existing physical network is the best way to accomplish all things that SDN is looking to do. You don't have to worry about swapping out your switch OS for OpenFlow. You don't have to worry about spinning up an OpenDaylight controller. You just install NSX, let it do all the dirty work, and your network works the right way.
If your data center is a house that you want to remodel, then an overlay is like applying new wallpaper over whatever's already on the wall. So long as the pattern or color you choose doesn't allow anything below to bleed through, you're in good shape.
In other words, the overlay works so long as there are no underlying issues with your existing physical network. You have to assume that all patch cables are correctly connected and that loops and multipathing have been taken care of, either by a Layer 2 fabric such as TRILL or through judicious use of spanning tree.
Of course, issues with the physical network will affect the overlay. No amount of intelligence or processing power can compensate for someone unplugging the core switch or looping a connection without spanning tree present. Overlays are quick and easy--provided that the underlying structure is intact and functioning.
Rebuilding the Wall
Forwarding technologies such as OpenFlow seek to accomplish the same function as an overlay by totally different means. These technologies aim to remove impediments in the switch by throwing out unnecessary software or forwarding. They rely on a central controller to do much of the heavy lifting. This approach requires a bit more architectural work. It also requires planning, as well as an understanding that there may be outages during the switchover.
[What is SDN all about? Greg Ferro breaks it down in "SDN Is Business, OpenFlow Is Technology." ]
To go back to our interior design analogy, OpenFlow is like scraping the wallpaper and paint off to redecorate from the very base of the wall. In extreme cases, you may need to remove the drywall down to the studs and build out again.
It's going to be messy, and you may have to stare at a skeleton wall for a while until the work is done. But the proponents of this method will tell you that it pays off in the long run because you don't have to keep putting paper over paper until the whole mess slides off onto the floor. In other words, you don't have to worry about the underlying physical network becoming a disastrous mess because no one ever works on it because they're only fussing around with the overlay.
Which Way To Go?
Unfortunately, I don't have a solution here. Overlays versus OpenFlow/forwarding configuration is the new OSPF versus EIGRP debate, or "Tastes great!" versus "Less filling!" Each camp has its vision and supporting case studies to prove their way works best.
Based on some entertaining and heated discussions that I've seen on Twitter, I doubt the two sides will ever come to terms. I find it interesting that Casado used to be firmly seated in the OpenFlow camp, and has now transitioned fully into the overlay side of the house. Maybe he sees something that we don't.
One thing for certain is the significant uptick in attention to and excitement around networking. Incumbent vendors are touting new products and architectures, startups are fighting to for a toehold using SDN as a wedge, and there's even open-source efforts being applied to both network software and hardware. If you're planning on a network renovation, you won't suffer from a lack of options.