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Quoting the magnet website (http://magnet-uri.sourceforge.net/): "MAGNET is an open URI-scheme and supporting practices/code for enabling seamless integration between websites and locally-running utilities, such as file-management tools."
A magnet link is an open technology used by many file sharing communities. Previously, if you were downloading a file from a Peer-to-peer network, you couldn't send a link of that file to a friend. A magnet link lets you do just that. It is also aimed to be independent of the Peer-to-peer technology, program or network being used, which makes magnet links exchangeable across networks, programs and platforms.
Unlike other types of links, for example HTTP or FTP, the magnet link is not an URL, but merely an URI, because it does not necessarily specify the precise location of the resource, which could be accessed directly. On Peer-to-peer networks, this implies that the resource (in most cases a file) must first be searched for in order to find one or more so-called 'sources', which then can be accessed. Therefore, the most common use of magnet links among file sharers are links which just contain a hash value, to uniquely identify a file. But note that magnet links are not limited to this use. Magnet links do however provide the facility to specify concrete locations for the resource, for example to avoid or limit the otherwise required search.
Magnet links are in no way directly related to BitTorrent, nor any other Peer-to-peer technology. Such applications merely make use of those magnet links, but the term "magnet" does never refer to a specific Peer-to-peer technology, network or program. Magnet links are not even limited to be used together with Peer-to-peer or file sharing, although, it's currently the most common use.
Here's what a magnet link could look like:
magnet:?xt=urn:sha1:YNCKHTQCWBTRNJIV4WNAE52SJUQCZO5C
In this example, the link merely contains a SHA1 hash value, which uniquely identifies a file or resource. It does not specify where this resource can be found; an appropriate search system is required, in order to access this resource, for example a Peer-to-peer network.
Sharing files
To share a file using a magnet link, a user creates a magnet link either by hand or using some program (in many cases a Peer-to-peer program). Then he can distribute this link to other users, for example on a website. Recent versions of major browsers understand those links and are able to properly hand them over to an installed magnet-compatible program.
External links
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