The core difference between 2 lies on performance.
Layer 3 routing is the concept used mainly for the routers which routes the packet between diff n/w. The layer 3 switching is used for the switches whihc are capable of doing both the routing and switching on the same box. i.e they have for L2/l3 capability.
The fundamental difference between a router and a Layer 3 switch is that Layer 3 switches have optimized hardware to pass data as fast as Layer 2 switches, yet they make decisions on how to transmit traffic at Layer 3, just like a router. Within the LAN environment, a Layer 3 switch is usually faster than a router because it is built on switching hardware. In fact, many of Cisco's Layer 3 switches are actually routers that operate faster because they are built on "switching" hardware with customized chips inside the box.
Yes, you can replace a router with a L3 switch. You cannot terminate your WAN connections on L-3 switches like ISDN BRI/PRI. ASYNC connections etc... Though on some of the switches you cna terminate T1/E1 like 4500 and 6500's.
As Ankur points out both the concept of routing and the concept of layer 3 switching are oriented to the function of forwarding traffic toward a destination based on the layer 3 information in the packet header.
As Ankur also points out historically there were some performance differences between routing and switching and switching would be more efficient because the switches did more of the forwarding decision in specialized hardware. In the more recent products more of the routers also have specialized hardware to improve their performance.
There is a slightly different question and I wonder if this is what George was asking in the original post: are there differences between layer 3 switches and routers. Since they are both using similar processes to make forwarding decisions you might think that they are the same. However most routers include features that are not supported in layer 3 switches. One example that I ran into recently was in support for Network Address Translation. I found that the layer 3 switch I was looking at did not have support for NAT while routers do. So is usually some difference between routers and layer 3 switches in terms of some of the functions that they support.
Thanks for clarifying the question. Both L3 switching and routing make a decision on forwarding a packet toward its destination based on the IP address in the layer 3 header. In that sense I believe that there is no significant difference in the terms layer3 switching and routing. For marketing reasons, some companies have used the terms as if there were a difference (they were working from the perception that switches are faster and better and routers are slower and less efficient). But functionally I do not see a difference between L3 switching and routing.
Hi everyone, I would like to thank you in advance for any help you can provide a newcomer like myself!
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