Tor is a worldwide network of proxies run by volunteers. They donate a chunk of their bandwidth to disguise the origin of others.
How it works
Tor establishes random encrypted tunnels between nodes in the network. The connections themselves are mixed to obfuscate the relation between incoming and outgoing ones. This way a passive observer only sees connections going into the network and coming out of the network, but is unable to correlate them. This way a Chinese Tor user may look like coming from Spain.
Look at the following diagrams for a more detailed explanation:



Using it
Downloading and installing the software easy, the configuration needs some attention. If you follow the given guides, you shouldn’t encounter any problems. Any software able to handle SOCKS-proxies now can talk to Tor. Firefox has an Addon called “Torbutton” to provide a one click interface.
You can not only relay your traffic over Tor, you can even run your very own hidden services.That means you can only access them by using Tor, there exist only inside the network. If you want, you can run any service you want: blogs, forums and do on. If you really need to, you can interface them with the non-Tor world, but that’s not needed usually.
The wide variety of users make the Tor network quite resilient (compared
to other proxy solutions). Since a lot of different people form a diverse group, you can’t single them out easily. Besides that you don’t have a single point of failure (or censorship). While Tor obfuscates your traffic, there are things you have to be aware of.
1. Tor is not fast
Tor nodes are run by volunteers and they donate some of their bandwidth. This greatly reduces what’s available to you compared to a non-Tor connection. Remember: your traffic will be relayed through several countries all over the world. Email works, but websites take longer to load (or may even time out) and instant messaging has noticeable delays. Running bittorrent over Tor is plain rude, since it eats a lot of traffic. There are users who’s life depend on Tor, so don’t litter it. You may speed up your browsing by using text-only (or console) browsers like w3m or links2.
2. Tor nodes can be rogue
Since everyone can join the network, bad guys will do so. Tor does not provide so-called end-to-end encryption, so you have to take care of it. Remember: everyone running a node could sniff passwords. If you use protocols, look for a secure counterpart (https instead of http, imaps instead of imap … look into SSL) or try to establish secure channels (look into ssh and VPNs data transmission, GnuPG and OTR for messaging).
3. Tor obfuscates where you’re from, not who you are
There are many things which make you recognizable, not only your IP. These are nicknames, particular browser configurations, even the choice of words to name a few. Be aware of that.
4. You can actively support Tor
Consider running an exit node. Every additional node makes Tor better (more bandwidth, more anonymity). Since you are an active participant it becomes even harder to do traffic analysis on what you do. If you can’t run an open exit node, consider running a bridge or at least relay traffic for the network. All these things improve the network and protect you more than plain hitchhiking. Please check your local law concerning regulations for providing proxy services and internet access. It’s quite different and nuanced under several legislation. If you can not or do not want to become an active supporter, you can always donate money.
If you want a quick portable solution, consider using the Tor Browser bundle, tails or Privatix.
References
documentation
EFF: What is a Tor relay?
documentation overview
Installation guides
Configuring a Tor relay
Configuring a hidden service
Manuals
Tor Wiki
Tor-Blog: Why Tor is slow
Legal FAQ
youtube: Setting up a Tor Relay
do good
donation page
NoiseTor
Zwiebelfreunde e.V.
other
an example of traffic analysis of Google Maps over SSL
OpenNet Initative: filter profiles per country
Reporters without Borders: Internet Enemies 2012(pdf)
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