Tor, an innovation of the Electronic Frontier Foundation, is a distributed network of virtual tunnels (you can think of it as a peer to peer network of proxy servers). Essentially data is transferred in encrypted form through multiple servers. It is very useful as a privacy measure because the data is encrypted and it’s very difficult to find the source of the data directly. It also comes in handy for getting around overly restrictive firewall policies (such as the Chinese government firewall, or the firewall my university campus network has) because it can be tunneled over any port you wish.

How to set up Tor and Privoxy on Ubuntu Linux - Corvillus