The loopback address, 127.0.0.1, is a special IP address that any networked computer (Windows, UNIX, or other) will recognize as addressing the local system. The MS Loopback Adapter is a driver that simulates having a physical network card. You can add any IP address to the MS Loopback Adapter and even use it to create routing loops. Since the MS Loopback Adapter is only a piece of software, your traffic doesn't go anywhere. The MS Loopback Adapter is generally used for testing purposes to trick software into thinking a network card is connected when there isn't a network connection available.
This was first published in May 2001