Defenition about proxy you will find at wikipedia here

Proxy servers provide three main functions:

1. firewalling and filtering
2. connection sharing
3. caching

Firewalling and Filtering

Proxy servers work at the Application layer, layer 7 of the OSI model. They aren’t as popular as ordinary firewalls that work at lower layers and support application-independent filtering. Proxy servers are also more difficult to install and maintain than firewalls, as proxy functionality for each application protocol like HTTP, SMTP, or SOCKS must be configured individually. However, a properly configured proxy server improves network security and performance. Proxies have capability that ordinary firewalls simply cannot provide.

Some network administrators deploy both firewalls and proxy servers to work in tandem. To do this, they install both firewall and proxy server software on a server gateway.

Because they function at the OSI Application layer, the filtering capability of proxy servers is relatively intelligent compared to that of ordinary routers. For example, proxy Web servers can check the URL of outgoing requests for Web pages by inspecting HTTP GET and POST messages. Using this feature, network administrators can bar access to illegal domains but allow access to other sites. Ordinary firewalls, in contrast, cannot see Web domain names inside those messages. Likewise for incoming data traffic, ordinary routers can filter by port number or network address, but proxy servers can also filter based on application content inside the messages.

Connection Sharing with Proxy Servers

Various software products for connection sharing on small home networks have appeared in recent years. In medium- and large-sized networks, however, actual proxy servers offer a more scalable and cost-effective alternative for shared Internet access. Rather than give each client computer a direct Internet connection, all internal connections can be funneled through one or more proxies that in turn connect to the outside.

Proxy Servers and Caching

The caching of Web pages by proxy servers can improve a network’s “quality of service” in three ways. First, caching may conserve bandwidth on the network, increasing scalability. Next, caching can improve response time experienced by clients. With an HTTP proxy cache, for example, Web pages can load more quickly into the browser. Finally, proxy server caches increase availability. Web pages or other files in the cache remain accessible even if the original source or an intermediate network link goes offline.