The 5-4-3 rule divides the network
The 5-4-3 rule divides the network into two types of physical segments: populated (user) segments, and unpopulated (link) segments. User segments have users' systems connected to them. Link segments are used to connect the network's repeaters together. The rule mandates that between any two nodes on the network, there can only be a maximum of five segments, connected through four repeaters, or concentrators, and only three of the five segments may contain user connections.
Requires a Signal to Reach Every Part of the Network
The Ethernet protocol requires that a signal sent out over the LAN reach every part of the network within a specified length of time. The 5-4-3 rule ensures this. Each repeater that a signal goes through adds a small amount of time to the process, so the rule is designed to minimize transmission times of the signals.
The 5-4-3 rule -- which was created when Ethernet, 10Base5, and 10Base2 were the only types of Ethernet network available -- only applies to shared-access Ethernet backbones. A switched Ethernet network should be exempt from the 5-4-3 rule because each switch has a buffer to temporarily store data and all nodes can access a switched Ethernet LAN simultaneously.
Recommended Reading: Webopedia's Ethernet Designations chart.
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