The Network layer, or OSI Layer 3

The Network layer, or OSI Layer 3, provides services to exchange the individual pieces of data over the network between identified end devices. To accomplish this end-to-end transport, Layer 3 uses four basic processes:
Addressing
Encapsulation
Routing
Decapsulation

The animation in the figure demonstrates the exchange of data.

Addressing

First, the Network layer must provide a mechanism for addressing these end devices. If individual pieces of data are to be directed to an end device, that device must have a unique address. In an IPv4 network, when this address is added to a device, the device is then referred to as a host.

Encapsulation

Second, the Network layer must provide encapsulation. Not only must the devices be identified with an address, the individual pieces - the Network layer PDUs - must also contain these addresses. During the encapsulation process, Layer 3 receives the Layer 4 PDU and adds a Layer 3 header, or label, to create the Layer 3 PDU. When referring to the Network layer, we call this PDU a packet. When a packet is created, the header must contain, among other information, the address of the host to which it is being sent. This address is referred to as the destination address. The Layer 3 header also contains the address of the originating host. This address is called the source address.

After the Network layer completes its encapsulation process, the packet is sent down to the Data Link layer to be prepared for transportation over the media.

Routing

Next, the Network layer must provide services to direct these packets to their destination host. The source and destination hosts are not always connected to the same network. In fact, the packet might have to travel through many different networks. Along the way, each packet must be guided through the network to reach its final destination. Intermediary devices that connect the networks are called routers. The role of the router is to select paths for and direct packets toward their destination. This process is known as routing.

During the routing through an internetwork, the packet may traverse many intermediary devices. Each route that a packet takes to reach the next device is called a hop. As the packet is forwarded, its contents (the Transport layer PDU), remain intact until the destination host is reached.

Decapsulation

Finally, the packet arrives at the destination host and is processed at Layer 3. The host examines the destination address to verify that the packet was addressed to this device. If the address is correct, the packet is decapsulated by the Network layer and the Layer 4 PDU contained in the packet is passed up to the appropriate service at Transport layer.

Unlike the Transport layer (OSI Layer 4), which manages the data transport between the processes running on each end host, Network layer protocols specify the packet structure and processing used to carry the data from one host to another host. Operating without regard to the application data carried in each packet allows the Network layer to carry packets for multiple types of communications between multiple hosts.