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I have a 'traditional' home network where my ISP modem/router acts provides WiFi hotspot and 4 ethernet connections for my home PCs.

I want to add a proxy server that will connect to the modem via ethernet and then it will route all the home network traffic. I want it to accept connections both over WiFi and ethernet.

Is it just a matter of buying a WiFi adapter that will act as 'master' and an extra ethernet adapter(s) that will connect to PCs then proxy software such as squid will route all traffic from these adapters to the outgoing modem connection? What consumer-level WiFi adapters provide WPA encryption as a hotspot?

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You don't need any additional network equipment. A proxy server doesn't "route" connections, rather it accepts requests for web pages from clients, and then fetches those web pages on behalf of the requesting client. It sits on your network like any other PC, and has no interest in whether those requests originated on the wired or wireless lan. You would want to plug it into the router on a wired port to save wireless bandwidth. If you don't have spare ports, then a simple unmanaged switch (netgear has a 5 port unmanaged switch which is pretty popular for domestic use) could be plugged into your existing router's lan ports to give you extras.

The benefits of having a proxy server are:

  1. Caching, where if two different clients request the same page, the cachable parts of the page can be delivered straight from the proxy server rather than being fetched from the origin server
  2. Control, where you may choose to block certain websites
  3. Monitoring, where you may want to track which sites are visited.

All you need is a machine to run squid on, and to update the proxy settings in each browser that you want to use it.

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