The Dynamic Host Configuration Protocol (DHCP) server dynamically assigns IP address, subnet mask, default gateway, DNS servers to a computer on a network. On a small network, the router is typically the DHCP server while on a larger network, a dedicated computer might be configured to perform the DHCP role. Computers on a network without a DHCP server will have to be manually configured with the above network parameters before they can use the network.
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How does it work?
Basically, it boils down to 4 distinct phases which are Discovery, Offer, Request and Acknowledge.
Discovery phase
The computer seeking an IP address, i.e. the DHCP client, will broadcast a DHCPDISCOVER message using the broadcast IP address of 255.255.255.255 that will be readable by all computers on that same network.
Offer phase
Upon receiving the DHCPDISCOVER message, the DHCP server allocates an IP address from its pool of available IP addresses and send the DHCP client a DHCPOFFER message telling the client the IP address and other relevant network parameters that the DHCP server is offering to the DHCP client.