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I was wondering if it is possible for Linux PC to substitute router in small networks.

I'm not expert in networking so this question may be stupid, but I don't see why one should not use Linux instead of expensive Cisco routers if there are programs for Linux that can do everything router can do.

So, is this even possible? If it is, what are limitations and possible bad situations this can produce? Can it be reliable?

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It is possible! You have unlimited freedom and flexibility and it is very reliable. Drawbacks I could think of are: Cisco offers training and certificates and you'll probably more likely find staff able to set up Cisco network gear compared to linux routers. – Marco Feb 25 '13 at 20:12
Yes, and it works very well. And moreover you can get it to do lots of things your CISCO (or whatever) box won't, like handling your mail, web, ... As always, this doesn't come free: It's price is that you have to learn a lot, and set up and manage it on your own. – vonbrand Feb 25 '13 at 20:17

You don't even need a Linux box if You wan't to try it out.

There are multiple Linux-based solutions available for home router devices allowing You to administer them from the command line (GUI for the less "get Your hands dirty" people) with

https://openwrt.org/ http://www.dd-wrt.com

being just the two most popular.

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Making the responses above official: yes, this works. Lots of people do exactly this (myself included), but there is a learning curve involved.

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could you pass some links where should I start? – 10robinho Feb 25 '13 at 23:36

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