A Node.js proxy server is a useful tool that sits between two services, processing and modifying requests and responses in both directions. It serves as an intermediary application, allowing for tasks such as authorization, load balancing, and logging to be performed. A simple proxy can be built using Node.js and the `http-proxy-middleware` library, enabling requests to be forwarded to multiple different servers or endpoints. The proxy can be used to test APIs, protect identities, and distribute traffic among deployments of an API service. With this basic understanding, further development and customization of the proxy server is possible.