Simply put, it sits in the middle between your miner(s) and your pool(s), in an effort to consolidate multiple miners/rigs through a single connection to the pool. Your miners connect to to the proxy, and the proxy connects to the pool (just once, even for multiple miners), resulting in a single difficulty for all connected miners.

Without a proxy, your miner connects directly to a pool. There's nothing wrong with this, generally speaking - but with miner crashes/restarts due to overclocking or bugs, the miner has to reconnect to the pool. This can mean that your miner is seen by the pool as 'new' after reconnecting, which is generally considered a bad thing (you can lose out on shares/sharerate as you might be treated as a pool hopper). It's important to note that there are multiple factors involved, and over time pools are likely trying to get better at detecting pool hopping more precisely.

With a mining proxy sitting in the middle, the proxy maintains the connection to the pool on miner disconnect, the proxy keeps track of current difficulty and mining job, etc. When miners reconnect, they receive those same values - essentially picking up where they left off. The pool doesn't see any disconnects, and so any impact from pool-hopping isn't attributed to your account.

In the past, others have stated that a 20% improvement in sharerate/shares/reduction in stale/invalid shares have been achieved through the use of a proxy. I'm interested whether this still holds true, assuming that miners and pools have actually improved over the last couple of years, which may not be that true... 🤔