When AND Why Proxy-ARP

In my training classes, I go to great lengths to teach when and why proxy arp is necessary on an interface.  I have seen (and answered) numerous questions on my mailing lists regarding proxy arp and it seems it is time to create an article that I can just point people to.  I will focus this article on Mikrotik RouterOS (as many of my articles are), but it should be noted that proxy arp is not unique to Mikrotik.
If you do not already understand what ARP is, then you will need to understand that before this article will make much sense.  ARP, which stands for “Address Resloution Protocol”, in simple terms is a mechanism that makes it possible for devices that are on an Ethernet-like network communicate.  Let’s take a very simple example where we have 2 devices plugged into an Ethernet switch using IP addresses 192.168.1.1 for device A and 192.168.1.2 for device B and subnet mask /24 (255.255.255.0).  These devices can communicate at layer 3 directly, because they are in the same subnet.  If Device A needs to send an IP packet to Device B, it will need to send that packet via the Ethernet switch.  This means that the IP packet will need to be framed in an Ethernet frame.  Device A already knows the IP address it needs to communicate with, but it needs a method to determine which MAC (Ethernet address) is associated with that IP address.  This is where ARP comes in.

Breaking a network in two with proxy ARP

Proxy ARP is a technique for splitting an IP network into two separate segments. Hosts on one segment can only reach hosts in the other segment through the router performing proxy ARP. If a router sits between two parts of an IP network and is not running bridging software, then routes to hosts in each segment and proxy ARP are required on the router to allow each half of the network to communicate with the other half.
Occasionally, this technique is incorrectly called proxy ARP bridging. An Ethernet bridge operates on frames and a router operates on packets. The proxy ARP router should have routes to all hosts on both segments. Once the router can reach all locally connected destinations via the correct interfaces, you can begin to configure the proxy ARP functionality.