The core principle of Tor, "onion routing", was developed in the mid-1990s by United States Naval Research Laboratory employees, mathematician Paul Syverson, and computer scientists Michael G. Reed and David Goldschlag, with the purpose of protecting U.S. intelligence communications online. Onion routing was further developed by DARPA in 1997.

The alpha version of Tor, developed by Syverson and computer scientists Roger Dingledine and Nick Mathewson and then called The Onion Routing project, or Tor project, launched on 20 September 2002. The first public release occurred a year later. On 13 August 2004, Syverson, Dingledine, and Mathewson presented "Tor: The Second-Generation Onion Router" at the 13th USENIX Security Symposium. In 2004, the Naval Research Laboratory released the code for Tor under a free license, and the Electronic Frontier Foundation (EFF) began funding Dingledine and Mathewson to continue its development.

In December 2006, Dingledine, Mathewson, and five others founded The Tor Project, a Massachusetts-based research-education nonprofit organization responsible for maintaining Tor. The EFF acted as The Tor Project's fiscal sponsor in its early years, and early financial supporters of The Tor Project included the U.S. International Broadcasting Bureau, Internews, Human Rights Watch, the University of Cambridge, Google, and Netherlands-based Stichting NLnet.

From this period onward, the majority of funding sources came from the U.S. government.

In November 2014 there was speculation in the aftermath of Operation Onymous that a Tor weakness had been exploited. A BBC source cited a "technical breakthrough" that allowed the tracking of the physical locations of servers. In November 2015 court documents on the matter, besides generating serious concerns about security research ethics and the right of not being unreasonably searched guaranteed by the US Fourth Amendment, may also link the law enforcement operation with an attack on Tor earlier in the year.

In December 2015, The Tor Project announced that it had hired Shari Steele as its new executive director. Steele had previously led the Electronic Frontier Foundation for 15 years, and in 2004 spearheaded EFF's decision to fund Tor's early development. One of her key stated aims is to make Tor more user-friendly in order to bring wider access to anonymous web browsing.

In July 2016 the complete board of the Tor Project resigned, and announced a new board, made up of Matt Blaze, Cindy Cohn, Gabriella Coleman, Linus Nordberg, Megan Price, and Bruce Schneier.

Tor enables its users to surf the Internet, chat and send instant messages anonymously, and is used by a wide variety of people for both licit and illicit purposes. Tor has, for example, been used by criminal enterprises, hacktivism groups, and law enforcement agencies at cross purposes, sometimes simultaneously; likewise, agencies within the U.S. government variously fund Tor (the U.S. State Department, the National Science Foundation, and – through the Broadcasting Board of Governors, which itself partially funded Tor until October 2012 – Radio Free Asia) and seek to subvert it.

Tor is not meant to completely solve the issue of anonymity on the web. Tor is not designed to completely erase tracks but instead to reduce the likelihood for sites to trace actions and data back to the user.

Tor is also used for illegal activities, e.g., to gain access to censored information, to organize political activities, or to circumvent laws against criticism of heads of state.

Tor aims to conceal its users' identities and their online activity from surveillance and traffic analysis by separating identification and routing. It is an implementation of onion routing, which encrypts and then randomly bounces communications through a network of relays run by volunteers around the globe. These onion routers employ encryption in a multi-layered manner (hence the onion metaphor) to ensure perfect forward secrecy between relays, thereby providing users with anonymity in network location. That anonymity extends to the hosting of censorship-resistant content by Tor's anonymous hidden service feature. Furthermore, by keeping some of the entry relays (bridge relays) secret, users can evade Internet censorship that relies upon blocking public Tor relays.

Because the IP address of the sender and the recipient are not both in cleartext at any hop along the way, anyone eavesdropping at any point along the communication channel cannot directly identify both ends. Furthermore, to the recipient it appears that the last Tor node (called the exit node), rather than the sender, is the originator of the communication.