What is MPLS?

MPLS stands for "Multiprotocol Label Switching". In an MPLS network, incoming packets are assigned a "label" by a "label edge router (LER)". Packets are forwarded along a "label switch path (LSP)" where each "label switch router (LSR)" makes forwarding decisions based solely on the contents of the label. At each hop, the LSR strips off the existing label and applies a new label which tells the next hop how to forward the packet.

What problems does MPLS solve?

The initial goal of label based switching was to bring the speed of Layer 2 switching to Layer 3. Label based switching methods allow routers to make forwarding decisions based on the contents of a simple label, rather than by performing a complex route lookup based on destination IP address. This initial justification for technologies such as MPLS is no longer perceived as the main benefit, since Layer 3 switches (ASIC-based routers) are able to perform route lookups at sufficient speeds to support most interface types.

Advantages of MPLS.

Traffic Engineering - the ability to set the path traffic will take through the network, and the ability to set performance characteristics for a class of traffic.
VPNs - using MPLS, service providers can create IP tunnels throughout their network, without the need for encryption or end-user applications.
Layer 2 Transport - New standards being defined by the IETF's PWE3 and PPVPN working groups allow service providers to carry Layer 2 services including Ethernet, Frame Relay and ATM over an IP/MPLS core.
Elimination of Multiple Layers - Typically most carrier networks employ an overlay model where SONET/SDH is deployed at Layer 1, ATM is used at Layer 2 and IP is used at Layer 3. Using MPLS, carriers can migrate many of the functions of the SONET/SDH and ATM control plane to Layer 3, thereby simplifying network management and network complexity. Eventually, carrier networks may be able to migrate away from SONET/SDH and ATM all-together, which means elimination of ATM's inherent "cell-tax" in carrying IP traffic.