To understand what a DAC is, we must first understand what an analog signal is. An analog audio signal is a continuously varying voltage that represents (or is analogous) to the continuously varying air pressure of a sound wave that you can hear. A microphone turns sound into an analog electrical signal representing the sound; a speaker converts an analog electrical signal back into the original sound (or as close as possible) which you can hear.
But how does one store an analog signal? A half century ago , one would store an analog signal as a groove on a record that moves the needle back and forth during playback to create an electrical analog signal representing the stored sound.
Today, we repeatedly sample and measure the height of the analog signal over time, and then store the series of numbers on the hard disk or in the flash memory of an audio player. This series of numbers is a digital audio signal. A CD-disc stores these samples as 16-bit binary (ones and zeros) words, 44,100 times a second, but digital audio data can be stored in a variety sample rates, word sizes, and encoding or compression formats, and are brought to you on everything from your cell phone to your laptop. In every case, though, the last thing that happens is that the digital numbers get converted back into an analog electrical signal that can be sent to your headphones. The device that does this is called a digital to analog converter, or a DAC.
Inside all media players a DAC used to convert the stored numbers into an analog signal that can be sent to your speakers or headphones. But if you want the numerous digits stored inside your player to sound as good as they did the day they were recorded, you need to use a high quality DAC. The easiest way to get a digital audio signal to an external high quality DAC is through a USB jack on your computer, but you can also get a digital signal from the optical and coaxial outputs of CD players, DVD players, and streaming audio gadgets of all kinds.