A proxy server serves as an intermediary between a user's device and the internet. It functions by receiving requests from clients, forwarding them to the appropriate destination, and then sending the data back to the client. Proxy servers provide several benefits, including improved security, user anonymity, and content filtering. They can cache data to speed up access to frequently requested resources and control user access to websites, enhancing network performance and security. Additionally, proxies can be used to bypass geo-restrictions and enable secure data transmission in corporate environments.