IP Discovery uses DHCP snooping, ARP snooping, or VM Tools to learn the VM MAC and IP addresses. After the MAC and IP addresses are learnt, the entries are shared with the NSX Controller to achieve ARP suppression. ARP suppression minimizes ARP traffic flooding within VMs connected to the same logical switch.
DHCP snooping inspects the DHCP packets exchanged between the VM DHCP client and the DHCP server to learn the VM IP and MAC addresses.
ARP snooping inspects the outgoing ARPs and GARPs of the VM to learn the IP and MAC addresses.
VM Tools is software that runs on an ESXi-hosted VM and can provide the VM's configuration information including MAC and IP addresses. This IP discovery method is available for VMs running on ESXi hosts only.
For Linux VMs, the ARP flux problem might cause ARP snooping to obtain incorrect information. The problem can be prevented with an ARP filter. For more information, see http://linux-ip.net/html/ether-arp.html#ether-arp-flux.