Confederations enable internal AS numbers to be hidden and announce only one (external) AS number to EBGP neighbors.
A large number of routers in a large transit AS would traditionally introduce a complex full-mesh structure of IBGP sessions. By splitting the AS into a number of small autonomous systems, you can provide each one of the small systems with a fairly simple IBGP structure. Interconnections between these autonomous systems could then be made using EBGP, which allows for arbitrary topologies.
Splitting an AS into smaller autonomous systems requires a large number of official AS numbers, which are a scarce resource.
However, by introducing the BGP confederation, you can enable a large AS to be partitioned into a number of smaller autonomous systems (called "member autonomous systems") where each is internal to the larger AS. The AS numbers of each member-AS that is used within the confederation are never visible from outside the confederation itself. This invisibility allows private AS numbers (in the range 64512 to 65535) to be assigned to autonomous systems inside a confederation to identify a member-AS, without the need to coordinate AS number assignments with an official AS delegation authority.
Within a member-AS, the classic IBGP rules apply. Therefore, all BGP routers inside the member-AS must still maintain a full mesh of BGP sessions.
Between member autonomous systems inside a confederation, EBGP sessions are established. These EBGP sessions behave slightly differently from classic EBGP sessions and are therefore named intra-confederation EBGP sessions to differentiate them from true EBGP sessions.
Configuring BGP on Cisco Routers (BGP) v3.2
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