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External "Designate" server is the solution you are looking for which you will need to combine with Neutron network.

The issue which you are facing of not resolveing the dns name, its root cause is the way internal Neutron DHCP implemented. Broadly speaking, Instance gets DHCP from the network node. There are different agents associated with Neutron like plugin agent, DHCP agent,l3 agent etc. These agents interact with the main neutron process through RPC (for ex RabbitMQ or Qpid) or through the standard Networking API.

For each network, there is dnsmasq instance which provides DHCP services and DNS services. The namespace is like qdhcp-<uuid>. That UUID is of the network.

What happens in the background : Whenver a port is created in Neutron server -> Neutron server notifies the DHCP Agent that new port has been created and that point DHCP agent requests via RPC channel for port information and from that information It Creates a file/data no.of files that dnsmasq uses to comeup with the DHCP allocation and DNS services for that port. The DHCP agent notifies dnsmasq that it needs to read that file/files. Then DHCP agent creates such hostname with mix of IP address like "Host-'I-P'".