The word proxy means "to act on behalf of another" and a proxy server acts on behalf of the user. It functions as a relay between the user and a destination Web site. A proxy server handles user request, downloads the requested Web site and forwards it back to user. Both user and requested resource think they are communicating with one another, but, in fact, are dealing with the proxy.
Anonymous proxy server allows users to surf the Web and keeps their IP address private - it hides the IP address of the user's machine from the Web site and may provide encryption on the user side.
Proxies are also used for bypassing blocked sites since URL-address of the requested Web sites are usually encrypted by proxy scripts.