Tor is an encrypted communications protocol. The Tor browser, for example, allows you to browse the internet without your service provider seeing what you're accessing. 'Tor' stands for 'The Onion Routing' protocol, and that gives you an idea of how it works. Each packet is wrapped in layers of encryption (like an onion) so that as one host passes it on to the next, the layers come off and on, so that the provider doesn't know where the message came from and doesn't know where it is ultimately going. This article is a summary of a much longer white paper describing the protocol.
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