[bennysaurus]

Technically Nicira does both. One of the tunnelling protocols it uses is STT (Stateless Transport Tunnelling) Protocol which they effectively made themselves (and is up for draft in the IETF). It's their mechanism of choice for communicating between the network controllers and hypervisors over the physical network.

It's not true TCP, but looks enough like like it to allow hardware offloading to the network interfaces of all the tunnelling, saving a lot of CPU power.

This allows for throughput speeds in an STT software tunnel to reach the same maximums as "raw" TCP through a given interface.