A Virtual Private Network (VPN) connects your computer to the Internet through a remote server in a different country. This gives you essentially a spoofed IP address, something that marks your location when you're on the Internet, since it appears as though you are accessing the internet from a different location than where you actually are.
If you combine this with good security for your own Internet network, you can be essentially anonymous online. Websites can't track you, hackers can't see what websites your browsing or steal your information, and ads can't target you. In this day and age of digital information, online anonymity is a coveted status. And so, several companies offer VPN services where they provide the remote server network, but even the company themselves won't know which server you're accessing.
This was pretty important back when Torrenting (a peer to peer file sharing method) was popular, but people were scared from the stories about how media companies found out about their illegal downloading and hit them with heavy fines and lawsuits. VPNs allowed people to torrent as much as they want without anybody finding out any details about their identity or location. VPNs often charge for a subscription, but they are often well worth it for someone who values online anonymity and cost about $10 to $15 per month.
On the other hand, there is a free alternative to VPNs, called Tor. Tor is short for The Onion Router, which similarly masks your identity by encrypting your Internet traffic and routing it through a series of remote servers. The reason it is free is that these servers are all hosted by volunteers, who generally support online anonymity and want to contribute in developing the Tor network. As your Internet traffic gets routed through these servers, called nodes, the IP address is changing and only when you get to your destination, your data is decrypted. This is almost akin to money laundering where your data is passed through several steps until it finally goes where you want it, without any trace of its history. Tor isn't perfectly anonymous, however. As you might imagine, some of these nodes, might be hosted by people with malicious intent (although this is why Tor routes traffic through tree separate nodes). This video is a good explanation of Tor:
Also, you might recall the infamous incident of Harvard student Eldo Kim, who sent a bomb threat to delay his exam, using Tor. While the information he sent was not leaked through Tor, they found out he was using Tor because he had accessed them using Harvard's wireless network.
Another drawback of Tor is that with all the nodes the traffic has to route through, the speeds are quite slow and not suited for any high bandwidth activity such as Torrenting or streaming media.
Tor and VPNs are actually two different types of network software that actually work better in conjunction, to provide you full anonymity on the Internet, as both have their advantages and disadvantages.
There is a difference between Tor and VPN. A VPN covers your entire network, while a Tor browser is simply a masked browser.
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