TOR routing when using an open TOR proxy

Question

My question is about how TOR handles routing of traffic. Here's the situation: User has laptop1 and server1 on a LAN. The server runs a hidden service (say a webserver) sharing over TOR only, i.e. open to localhost only, at xxyyzzaabbcc.onion. The server allows TOR proxy connections from the LAN.

If the user points configures his laptop to use server1:9050 as a proxy and navigates to xxyyzzaabbcc.onion, does the local TOR instance on server 1 recognize that traffic as local and simply forward the request to localhost, or does the traffic first go out over the TOR network, then back to server1's localhost to get to the webserver?

Put another way, if someone on the LAN uses server1's proxy to access that proxy's hidden service, does the traffic stay local?

Answer 1

Even if the laptop and the server with the onion service were on the same network. If you connect to the onion service from the laptop, it would still go out to the Tor network, and then back in as if it were someone else. It is not aware of local traffic.

Though this might seem like wasted bandwidth, this is a good thing because it protects your anonymity by always requiring connections through Tor and not through some shortcut local connection that can be monitored without the security of the Tor network.