THIS IS A TEST INSTANCE. Feel free to ask and answer questions, but take care to avoid triggering too many notifications.

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Did you notice that the ICMP errors coming from the upstream interface, facing your host #1? After your ICMP request passes that, without expiring the TTL, it goes on to the next network. So the router with interface 172.17.1.1/16 has an interface 172.16.1.1/16 as well. That is the network on which the next interface is the target interface.