Without DHCP, users have to manually input the IP address, subnet mask, and other network settings to join the network. The DHCP server maintains a pool of IP addresses and leases an address to any DHCP-enabled client when the client is powered on. Because the IP addresses are dynamic (leased), rather than static (permanently assigned), addresses no longer in use are automatically returned to the pool for reallocation. As shown in the figure, when a DHCP-configured device boots up or connects to the network, the client broadcasts a DHCP discover (DHCPDISCOVER) message to identify any available DHCP servers on the network. A DHCP server replies with a DHCP offer (DHCPOFFER) message, which offers a lease to the client. The offer message contains the IP address and subnet mask to be assigned, the IP address of the DNS server, and the IP address of the default gateway. The lease offer also includes the duration of the lease.

The client may receive multiple DHCPOFFER messages if there is more than one DHCP server on the local network; therefore, it must choose between them, and sends a DHCP request (DHCPREQUEST) message that identifies the explicit server and lease offer that the client is accepting. A client may also choose to request an address that it had previously been allocated by the server.

Assuming that the IP address requested by the client, or offered by the server, is still available, the server returns a DHCP acknowledgement (DHCPACK) message that acknowledges to the client that the lease is finalized. If the offer is no longer valid, perhaps due to a timeout or another client taking the lease, then the selected server responds with a DHCP negative acknowledgement (DHCPNAK) message. If a DHCPNAK message is returned, then the selection process must begin again with a new DHCPDISCOVER message being transmitted. After the client has the lease, it must be renewed prior to the lease expiration through another DHCPREQUEST message.

The DHCP server ensures that all IP addresses are unique (the same IP address cannot be assigned to two different network devices simultaneously). Using DHCP enables network administrators to easily reconfigure client IP addresses without having to manually make changes to the clients. Most Internet providers use DHCP to allocate addresses to their customers that do not require a static address.