IP Masquerading - Let Everyone On Your Network Access The Internet

Linux supports IP Masquerading, which allows any number of machines to surf the Internet through one machine, using only one IP address. With IP Masquerading and a network, every computer at your home or business can share the Internet connection, even if you only have one IP address assigned by your ISP, even if the software doesn't support proxies

IP Masqeurading is not a proxy service. The way it works is simple. The Linux box connects to your ISP (by modem, ISDN, T1, whatever) and is assigned an IP address. When other clients on the network want to talk to the Internet, they send the packets to the Linux box (which is set up as the default gateway). The Linux box rewrites the outgoing IP packets to look like they came from itself, and when the replies come back, it rewrites them to look like they came directly to the client.

This way, lots of clients can share the connection at the same time, and the Linux box keeps track of which traffic goes where. This is usually a lot cheaper than getting multiple IP addresses from your ISP, and even software that doesn't support proxies works fine with IP Masquerading. Read more about it in the IP Masquerade mini-HOWTO.

Of course, Linux also supports proxies like Squid, which can also cache files and optimize the use of bandwidth.