Overview
Tor supports two classes of cover traffic: connection-level padding, and circuit-level padding.
Connection-level padding uses the PADDING cell command for cover traffic, where as circuit-level padding uses the DROP relay command. PADDING cells are single-hop only and can be differentiated from normal traffic by Tor relays ("internal" observers), but not by entities monitoring Tor OR connections ("external" observers).
DROP relay messages are multi-hop, and is not visible to intermediate Tor relays, because the relay command field is covered by circuit layer encryption. Moreover, Tor's 'recognized' field allows DROP messages to be sent to any intermediate node in a circuit (as per Section 6.1 of tor-spec.txt).
Tor uses both connection level and circuit level padding. Connection level padding is described in section 2. Circuit level padding is described in section 3.
The circuit-level padding system is completely orthogonal to the connection-level padding. The connection-level padding system regards circuit-level padding as normal data traffic, and hence the connection-level padding system will not add any additional overhead while the circuit-level padding system is actively padding.