What is VPN and how does it work ?

Overview
VPN is a secure, private communication tunnel between two (or more) devices accross a public network (like the Internet). These devices can be computers running some type of VPN software, or VPN-enabled routers. All of the VPN data is secure regardless of the fact it travels over a public network. VPN implementations use strong encryption and monitor traffic to ensure no packets have been altered. The encryption and data verification are very processor intensive, and the few SOHO broadband routers on the market that can act as VPN servers have somewat limited throughput.

VPN Protocols
There are two major protocols that VPN supports. Microsoft uses PPTP (Point to Point Tunneling Protocol) and other companies often use IPSec (Internet Protocol Security). Most broadband routers can pass PPTP traffic by forwarding port 1723 but IPSec is more complex. If your router does not explicitly support IPSEC pass-through, then even placing your computer in the DMZ might not work.

PPTP has decent encryption and also features "authentication" for verifying user IDs and passwords. IPSec is pureley an encryption model and is mutch safer but does not include authentication routines. A third standard, L2TP is IPSec with authentication built in.

VPN Servers and Clients
VPN servers are hardware or software that listens for incoming connections, and acts as a gateway into a local network (or a single computer). VPN Clients are most often software based, and have the ability to "call" VPN servers, logon and communicate as they're on the same "virtual" network. Many broadband routers can pass such sessions (one or more, depending on the router) over the Internet, but very few SOHO models can act as VPN servers themselves.

Also see: Why encrypt your online traffic with VPN