[From Wikipedia] In an onion network, messages are encapsulated in layers of encryption, analogous to layers of an onion. The encrypted data is transmitted through a series of network nodes called onion routers, each of which “peels” away a single layer, uncovering the data’s next destination. When the final layer is decrypted, the message arrives at its destination. The sender remains anonymous because each intermediary knows only the location of the immediately preceding and following nodes.
Onion routing was first developed in the mid 90’s by the United States Naval Research Laboratory employees, mathematician Paul Syverson, computer scientists Michael G. Reed and David Goldschlag.