One embodiment provides a system and method for automatic discovery and configuration of tunnel endpoints in a network. During operation, the system can broadcast, from an active tunnel endpoint, a peer-discovery-request message to the network. In response to receiving a peer-discovery-response message from a passive tunnel endpoint, the system can determine whether the passive tunnel endpoint has a tunnel based on the received peer-discovery response. In response to determining that the passive tunnel endpoint does not have a tunnel, the system creates a tunnel between the active tunnel endpoint and the passive tunnel endpoint and exchanges tunnel-configuration messages over the created tunnel.