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I am trying to understand how MAC addresses work and what their purpose is. I believe them to work like this:

Each computer on a LAN has a MAC address which can be used to identify each. When a packet goes out, my router replaces my MAC address with its own, and each step around the network the next device replaces the MAC address with its own.

If I am plugged into a modem via cable, does the modem still replace my MAC address with its own, or does my MAC address go all the way to the website that I am communicating with?

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Each computer on a LAN has a MAC address Almost: Each network card has a unique 48 bits value to identify itself. Not the computer. The distinction is moot if you only have a single network card in the computer, but it gets relevant if you have multiple network cards. – Hennes Jan 1 '13 at 18:00

MACs are only used to select a NIC on the local network.

Once you datagram leaves the router the MAC is no longer needed and no information about it is transmitted. Since it is not transmitted your ISP nor any other computers outside your LAN received any information about it.

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It it uses ARP to match an IP to a local MAC. A datagram to an IP looks like this when it hit the wire: Preample(62 bits long), Start of frame delimiter, destination MAC (48 bits) | source ethernet adress (source MAC, 48 bits) | Optional VLAN tag | Length or type (e.g. type IPv4), Actual data payload, frame checksum. IP is just one layer higher. – Hennes Jan 1 '13 at 17:55

A MAC address (Media Access Control) is a OSI-Layer 2 48 Bit long unique address. Well at least it should be unique. Each network-device in a computer,- usually this is a network card and a computer could have more than one network devices,- has its own address which is composed from the OUI (the first 24 bits )and a unique ID (the last 24 bits).

Remember! Conmputers not necessarily talk to each other. rather think of network cards can talk to each other.

This address is used by the Switch or a Hub to send data frames over the Ethernet to your computer.

Most people are buying a device which actually is a router and a switch combined. the router is sending and receiving data through networks using ip-addresses. The Switch is sending and receiving frames to network cards using MAC-Addresses.

Because internetworks generally use network addresses to route traffic around the network, there is a need to map network addresses to MAC addresses. When the network layer has determined the destination station's network address, it must forward the information over a physical network using a MAC address. Different protocol suites use different methods to perform this mapping, but the most popular is Address Resolution Protocol (ARP).

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Your router replaces MAC address only for packages outside your local network. Yes, your ISP sees only your modem MAC address, because WAN (ISP's network) is outside your local network.

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