Rishabh Poddar:

Tor implements onion routing to provide anonymous communication over the network. Essentially, Tor encrypts the data and sends it over the network via randomly selected relays. The data is encrypted in layers (like an onion), and each relay peels off a layer of the onion to reveal only the IP address of the next relay in the circuit. The final relay decrypts the innermost onion layer, and sends it to the intended destination. As a result, at each step the relay knows nothing but the IP addresses of the previous hop and the next hop. The source and destination IP addresses are never revealed, thereby providing anonymity. The method removes any single point in the path at which the communicating peers could be determined.
Moreover, session keys are negotiated by the source with each successive hop. Once the keys are deleted, old traffic cannot be decrypted by a subsequently compromised node. The technique therefore also provides perfect forward secrecy.