alt Hacker NewsPropellers (both marine and aero) are just spinning wings. If you picture a 2D airfoil like you might see in one of those "intro to lift" diagrams, all the flow is in what we call the chordwise direction, that is the flow is entirely along the axis of the wing's chord (leading edge to trailing edge).
A real 3D aircraft, however, has a fuselage. Similarly, a prop has a hub and the tips of each blade are spinning faster than the roots. The tl;dr of this is that real 3D lifting surfaces typically exhibit a mixture of chordwise and spanwise flow, which causes wingtip vortices to form[0], resulting in induced drag/induced power loss.
For a given amount of thrust the total amount of momentum that the prop transfers to the fluid is fixed. The tip of a conventional prop ends abruptly which causes a large pressure gradient and a strong vortex. A toroidal prop's shape causes the pressure gradient to be broader and less concentrated, therefore the wake vorticity is distributed over a larger region, reducing peak swirl velocities and lowering the kinetic energy lost to vortex formation (and to cavitation).