Squid is a high-performance caching proxy server that stores frequently accessed web content to improve network efficiency. It reduces bandwidth usage on busy networks by caching content locally. Squid communicates with peer caches using the Inter-Cache Protocol and can operate as a traditional proxy or front-end accelerator. Configuring Squid involves setting up TCP/IP on the server, editing squid.conf to change ports and define access rules, restarting Squid, and configuring clients to use the Squid server address.