Firewalls can protect a network at multiple layers of the OSI models, however most of the firewalls do not have the ability to monitor the payload of the packets and see if an application level attack is taking place.
Today there are a new breed of firewall called Unified Threat Managers or UTM. They are a collection of products on a single computer and not necessarily a typical firewall. A UTM can address all of the layers but typically a firewall cannot.
Firewalls are security checkpoints at the boundaries of internal networks through which every packet must pass and be inspected, hence they create bottlenecks between the internal and external networks. But since external connections are relatively slow compared to modern computers, the latency caused by this bottleneck can almost be transparent.
By implementing the concept of border security, they centralize security services in machines optimized and dedicated to the task, thus relieving the other hosts on the network from that function.
Source: STREBE, Matthew and PERKINS, Charles, Firewalls 24seven, Sybex 2000, Chapter 1: Understanding Firewalls.
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