The command no ip proxy-arp was one of those things which I saw in IOS configs and wasn’t to sure what proxy arp is used for or why it exists. Proxy ARP is where a router will respond on behalf of another device, it was used heavily in networks before the days of DHCP & default gateways where a host would ARP for an address that wasn’t on its subnet (modern networks just send the packets to the default gateway instead of arping for the address), the router on the local network would then act as a “proxy” and respond on behalf of the device outside of the subnet.

Proxy ARP isn’t used if hosts are set with default gateways or have routing intelligence, setting a default gateway instead of using proxy ARP is a much better option. Using Proxy ARP instead of a default gateway results in higher ARP traffic & the ARP tables of the hosts get very large as they maintain an IP/MAC binding for every single address the communicate with.

A pop quiz fact: I haven’t been able to verify this from another source but somebody at work told me that IBM helped created DHCP as they would assign workers/visitors with static IP addresses and as people moved around addresses would get lost, eventually they lost 750,000 addresses and needed to create a solution which stopped this from worsening. This is hear say and I cant vouch for its authenticity but its a decent story to talk about the need for DHCP.