Helping people with computers... one answer at a time.
Proxy servers sit between you and your internet connection, often caching or filtering the content as it makes its way from server to you.
A proxy is a stand-in for you - someone who does something on your behalf. A proxy server is a kind of stand in for your computer.
The questions that raises of course would be how, and ... why?
A good example, and the one you probably see the most, is a web proxy. When configured to use a proxy, your web browser contacts the proxy server for each web access instead of going directly to the target server on the internet. The proxy server then turns around and makes the "real" request of the web server. The proxy server gets the response, and then passes it back to you.
So why go through that extra layer?
A proxy server is designed to understand, and act on the data that's going across it. For example a company's web proxy server might be where access to certain sites is blocked. It might track the surfing activities of employees or scan the returned web pages for viruses.
A proxy also hides the computers behind it. For example a company's web proxy may look like only one or two machines to the outside world, but in fact there may be several hundred employees surfing the web through it.
Proxy servers can also cache data. If everyone behind a proxy is requesting the same data over and over again, a proxy might elect to keep a local copy, and not bother getting it from the internet for every request.
Since you might also be wondering, some of the functions of a proxy are similar to a NAT router or a firewall. The biggest of several differences is that a proxy server actually understands the data that it's acting on. NAT routers and firewalls typically only understand details of where the data is going to or coming from, but not what it contains.
As you've already noticed, in most cases proxy servers are not used by typical internet users. There are certain situations ... usually corporate, and certain ISPs that require their use. The good news is that it's uncommon enough that if you do require it, it should be part of the setup information provided by your company or ISP.
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