I love this, i use it instead of a proxy. From my understanding, it sends the data between the sender, and the receiver through random TOR hubs. TOR hubs consist of normal people volunteering their extra bandwith to transmit your data to and from a peer/server. all data sent through TOR is anonymous, and is free as well. This is not like a regular proxy, because it does many hops to transmit data, instead of just one, like regular proxies. Most proxy providers have information on you that they are obligated to give if they are asked by authorities, TOR servers do not have any information about you, and so the "feds" can do nothing. I think that these diagrams best explain how TOR works.
TOR is very slow at the moment, due to lack of high-bandwith servers, but should be OK for IM clients, and general web browsing, if you would like to try it out, here's a link: http://tor.eff.org/index.html.en
The Onion Router (TOR)
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