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The TOR project
The Tor project is a cooperative development of an application that allows its users to obtain complete anonymity, free from even the threat of network analysis, by routing all traffic through a network of independently operated relay nodes. Tor users configure their internet browser, messaging software or similar to work with the Tor executable, and then while the program is running their IP address and geographical location will appear to be that of the latest node in the randomly selected Tor network path.
The free anonymity afforded by Tor is however provided with a downside — the general transfer speed can be quite low. It is not recommended to run Tor all the time for all of your internet needs. Nevertheless, one can quickly adapt to Tor especially for text-based usage such as anonymizing your IRC, e-mail and messenger traffic.
Tor is operated by contributors and donors of server bandwidth who volunteer their machines or partitioned sectors toward the enhanced security of all. Some of these volunteer relay operators are undoubtedly intelligence and honeypot operations, but their efforts are more of a research type as there is not much they can do without running most of the relay nodes. This compartmentalized type of Internet protocol is indeed what enables Tor’s great anonymity. One hop commercial aggreggators stand out like a sore thumb and can easily be compromised, yet the Onion model of proxy network IP addressing allows Tor to deliver local control with global access.
Tor relay operators can customize their exit policy as needed so as to limit port exposure. Tor sets bug trackers and asserts authority over Tor directory usage intermittently. Logging of instances of directory access and bandwidth exchanges permits the Tor operability to remain in the background yet provide user security.
Legality
It is not illegal to anonymize your communications; it goes under the right to privacy which is widely accepted to be very important. According to the Tor legal FAQ, no one has gotten in trouble for using Tor or running a Tor relay node to date.
Tor users must however respond to valid complaints of abuse per their policies. Tor was created with the secure delivery of information in mind, not to enable criminals. DMCA violations, spam, Denial of Service and other malicious uses can therefore result in tracking and being booted off the network — or worse.