Methods and systems for flexible nodal layer 3 overlay of layer 2 traffic is described. A network includes an access device for receiving layer 2 traffic from user devices, a packet inspection device for inspecting the layer 2 traffic, and a layer 3 tunnel instantiation device for encapsulating the layer 2 traffic into layer 3 traffic. The layer 3 tunnel instantiation device provides a first tunnel endpoint for a layer 3 tunnel, which is connected to a second tunnel endpoint instantiated at a network gateway. The layer 3 tunnel instantiation device establishes a moveable demarcation between a layer 2 domain and a layer 3 domain with respect to the packet inspection device, where the access device and the packet inspection device operate in the layer 2 domain. The layer 3 traffic is transmitted over the layer 3 tunnel.