2-node circuits Vs 3-node circuits

[Steve Southam <ssoutham@xxxxxxxxxxx>]

Hello,

Is there really any difference in terms of anonymity and encryption 
between circuits containing 2 nodes or 3 nodes?
In a 2-node circuit, if someone is snooping node 1 they can see the IP 
address of the client but not the traffic and not the destination IP 
address.
If you're snooping node 2 you can see the destination IP address but not 
the source.
If 3 really is better than 2, then why not use 4 or 5 to be even better?

Thanks
Steve