Tor: Anonymous TCP

Tor is an anonymizing layer on top of TCP. It uses a concept called "onion routing" to keep your online activities anonymous. Basically, packets are routed at random through a network of Tor servers (provided by the Tor user community), making it very difficult to trace their real origin. The contents are encrypted separately for each server, so only the final Tor server will be able to read your payload data, just before it is sent to it's final destination, but by that time the IP information tying that packet to you will be lost.

In short, Tor is to TCP what Mixmaster is to email.

If this all sounds too confusing, check out the nice article on Wired's website.