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It's simpler than you think.

The extension has common files (jquery etc) requested included with it, and list of CDN curls that return those files. Every time browser makes request to those urls, the extension serves the local file back.

How does that help? It speeds up browsing, since you have local version of the requested file. It also increases privacy. For example many sites are lazy and use for example google cdn for let say jQuery. Now when you visit the site, google still can track you, because you make request to them.

The only weakness with this approach is that it only works for urls known to the author. Request to unknown CDN or even known CAN, but a new file will still be made (AFAIR there is an option to block unknown files on known CDN, but that will often break many websites)

I thought one of the benefits of using something like Google CDN to serve jQuery was meant to be that a person's browser was much more likely to have that in their cache than mylittlewebsite.com?

That's true, but you don't really have to let Google know which sites you visit in order to pull the jQuery library. This extension provides the files from a local cache so that you avoid the requests to a great extent and thus minimize any tracking. If mylittlewebsite.com and yourlittlewebsite.com both use Google CDN for jQuery, Google would know that you visited these two sites. With this extension, there's lesser chances of Google or another CDN getting all instances of the jQuery download requests (unless each site is using a different newer version of jQuery that's not locally cached yet).

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