Tor (=The Onion Router) is an open source software implementation of the so-called onion routing protocol.
Tor's idea is to protect its users against traffic analysis attacks. Volunteers operate an overlay network of onion routers that enable anonymous outgoing connections and anonymous "hidden" services.
Disadvantages
DNS leaks
As with many anonymous web surfing systems, direct DNS requests are still performed by many applications, without using the Tor proxy.
Traffic analysis
Like all current low latency anonymity networks, Tor is vulnerable to traffic analysis from observers who can watch both ends of a user's connection.
Eavesdropping by exit nodes
It was revealed that by operating and monitoring Tor exit nodes it is possible to intercepted usernames and passwords for a large number of email accounts.