What are the pros and cons of ad hoc connections versus access points?

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The IEEE 802.11 standard defines two modes of operation. Ad Hoc Mode refers to a peer-to-peer association established directly between two wireless stations. Infrastructure Mode refers to associations between a group of wireless stations and an access point (AP). Ad Hoc Mode is also referred to as an Independent Basic Service Set (IBSS) because there is no AP involved.

As you have noted, Ad Hoc Mode can easily connect two wireless laptops directly to each other. Both stations must be configured with the same Service Set Identifier (SSID) and same WEP key values (or no WEP keys). The new improved encryption provided by Wi-Fi Protected Access (WPA) does not support Ad Hoc Mode, so you are limited to the older WEP encryption. You also cannot take advantage of common AP security filters -- for example, controls that restrict access to only stations with known MAC addresses. An attacker can use the shareware tool NetStumbler to "sniff out" a laptop configured for Ad Hoc Mode, then try to associate to that laptop. If you're using WEP, the attacker must have your WEP keys to associate. Unfortunately, a motivated attacker can use shareware to crack your WEP keys given enough traffic.

Also, keep in mind that each wireless adapter can only have one wireless association at any point in time. For example, laptop X can't have an association to laptop Y and another association to laptop Z simultaneously. To connect three or more stations together, you'll need to use Infrastructure Mode with a wireless AP (or wireless router).