The technology disclosed herein enables a dynamic chain of virtual service functions for processing network traffic in a virtual computing environment. In a particular embodiment, a method includes providing a service chain policy to a virtual routing element connecting the respective service functions and determining an initial classification of a network packet entering the dynamic service chain. The initial classification indicates at least a first service function in a sequence of the service functions for processing the network packet. The method further includes providing a service chain policy to a virtual routing element connecting the respective service functions. After the network packet has been processed by a one service function in the sequence and before the virtual routing element passes the network packet to a next service function in the sequence, the method provides applying the service chain policy to the network packet in the virtual routing element to determine the next service function and directing the network packet from the virtual routing element to the next service function. The process continues till the packet passes through all service functions till it reaches its destination.