The DAC is the heart of a file-based or streaming digital audio system.
Storing music or video for that matter in a digital format has some significant advantages. The physical space needed is trivial to non-existent as a problem. There are a lot fewer issues with long term storage such as moisture problems, print-through on magnetic tape and many more. Digital also makes the effort of copying and transferring content almost zero. File-based storage of music brings up issues of copyrights and much more. I will not dwell on that here.
Computers can store music in files using many different methods. For the sake of brevity, I am going to ignore format here. Getting the digital data from the computer to the DAC is done using several methods. In the end, the DAC receives the digital music file serially from start to end. The music file is not transferred to the DAC as it would be to a disk drive.
***Now all you DAC designers out there give me this one. I am overly simplifying on purpose. ***
A DAC can use one or multiple methods of conversion. The process is rather simple. In PCM (Pulse Coded Modulation) audio formats, a group of digital bits is formed up into a numeric value depending on the specified encoding size such as 16 or 24 bits which sets an instantaneous analog audio output level. The process happens at that prescribed bit rate of the audio file such as 44..1 Kbps. (44 thousand times per second in this example).
While PCM is pervasive, there is another format called DSD (Direct Stream Digital). This format is encoded and decoded differently than PCM. While the process is different, the intended results are the same.
Finally, there is another encoding format called MQA that is used to envelop the PCM data to provide information to the DAC subsystem. The stated purpose of MQA is to inform the decoding process about the original recording and encoding of the data to improve playback. MQA has a HOTLY contested premise, and I am only re-stating the purpose here not endorsing or otherwise commenting.
In this extremely brief overview of the DAC, I am not discussing filtering, clocking or other processing methods used in production equipment.
I want to discuss one other about the DAC. The influence of other things around the DAC. One example is the power supply for the DAC. We have many instances where a "good" power supply improves the sound quality of the DAC. The influence of upstream components on the DAC is wild. Welcome to the center of your digital universe.
Here are three articles on Wikipedia for reference. Please note that Wikipedia has these marked for some edits.