Mapping IP addresses to geolocations is done via tables, where an IP maps to a particular location. This location, however, does't need to be accurate, since IP addresses don't carry any information about their locations, these are approximated.
From http://en.wikipedia.org/wiki/Geolocation_software:
The primary source for IP address data is the regional Internet registries which allocate and distribute IP addresses amongst organizations located in their respective service regions:
- American Registry for Internet Numbers (ARIN)
- RIPE Network Coordination Centre (RIPE NCC)
- Asia-Pacific Network Information Centre (APNIC)
- Latin American and Caribbean Internet Address Registry (LACNIC)
- African Network Information Centre (AfriNIC)
Secondary sources include:
- Data mining or user-submitted geographic location data. For example, a weather web site might ask visitors for a city name to find their local forecast. Another example would be to pair a user's IP address with the address information in his/her account profile.
- Data contributed by internet service providers.
- Merging databases from different suppliers.
- Guesstimates from adjacent Class C range[2] and/or gleaned from network hops.
Accuracy is improved by:
- Data scrubbing to filter out or identify anomalies.
- Statistical analysis of user submitted data.
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