VDE (virtual distributed ethernet) is a virtual switch. This means that an instance of VDE behaves much like a physical network switch, only with the difference that is lives within a host OS environment.
Like a physical switch, a VDE switch is also a level 2 network device, and it has a number of ports. In short, it is a device that can be used to connect multiple NICs (from virtual machines) for OSI level 2 and above communication purposes. TCP/IP are OSI level 3 protocols, so NICs connected by a switch can communicate using TCP/IP.
In addition to being a switch, VDE also has the necessary utility program to serve as a NAT router and a DHCP server. This means that VDE has all the functions of a residential gateway.