What is DHCP and how, exactly, does it work?

DHCP stands for Dynamic Host Configuration Protocol and it is a server service. Its main purpose is to lease IP addresses to network clients. Although it's main purpose is to lease IP addresses to network clients, it also provides related IP information such as subnet masks, default getaways, and the IP address to DNS servers. DHCP works by leasing an unique IP address to a network client for a certain period of time. DHCP works through four main steps:

1. When a network client's computer boots up, it sends out a packet called DHCPDISCOVER and this packet contains the computer name and MAC address and basically requests for a IP address from DHCP servers.
2. DHCP servers then respond to the packet with a DHCPOFFER.
3. Then the client computer responds with a DHCPREQUEST packet and this basically means that the client has accepted the offer and would like to lease the IP address.
4. This is the final step of the DHCP process. The DHCP server responds with a DHCPACK message that contains all the IP information and acknowledges the acceptance of the offer.

The client computer is part of the TCP/IP network and can communicate on it now since every computer on this type of network model needs an unique IP address.

-Information paraphrased from http://www.dummies.com/how-to/content/installing-and-configuring-dhcp.html