What You'll Need
To get started, you need just a few things. Most importantly, you'll need a jailbroken iPhone (2G or 3G or 4G) with a data plan. If you've haven't already jailbroken your iPhone, grab a copy of the PwnageTool or WinPwn and follow the simple jailbreaking wizards. All jailbroken? Good. Now assuming you've got a laptop, let's get this party started.
Install PdaNet
Fire up your jailbroken iPhone and launch the Cydia application from your homescreen. Tap the search tab, then do a quick search for PdaNet. Once you find it, tap the Install button on the top right of the screen. Follow the install dialog and you're done.
Create an Ad-Hoc Network
This is the most complex sounding part of the setup, but it's actually very simple. Your laptop is capable of creating an ad-hoc wireless network that allows data to pass between it and the device that connects to it. In this case, we're going to create an ad-hoc network between your laptop and your iPhone so that your laptop can use your iPhone's data connection. Simple enough, right? Setting up the ad-hoc network varies depending on what operating system you're using. On OS X, it's a breeze: Just click on Create Network... on your Airport drop-down. Give your ad-hoc network a name and set up a password if you like. That's all there is to it. It's a little more complicated if you're on a Windows laptop, so here's how to set up an ad-hoc network in XP and here's how to do it in Vista.
Ladies and Gentlemen, Start Your Tethering
Once you've set up your ad-hoc network, tethering your iPhone to your laptop is a breeze. Just open your iPhone Settings, tap Wi-Fi, and select your newly created network. Then head back to your home screen, launch PdaNet, and flip the WiFi Router switch at the bottom of the screen.
What Else Do You Need to Know?
PdaNet stands out among its competition because—unlike the other methods we've seen—once you're rolling with PdaNet, every application on your computer has full access to the internet. Most other methods set up a SOCKS proxy, so only applications supporting that proxy will work. PdaNet runs in the background, so you can leave the application running and do other multi-tasking on your phone if you need to. The one thing you need to be particularly aware of when using PdaNet is your battery. While running, PdaNet will suck the energy from your battery with the vigor of an aggressive teenage makeout session. Even with my phone plugged in and charging, I still see a net battery drain overall. So plug in your iPhone while you're tethering or your phone will die quickly. Other than that, PdaNet works like a charm. I called this method the easiest setup, and although the steps may look fairly involved, once you learn to set up the ad-hoc network on your laptop, it takes under a minute to get your tether on.