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Simply put, Domain Name Servers or DNS servers are databases that translate domain names into IP addresses; the unique identifier of machines on the Internet.
As DNS servers get billions of DNS requests each day, one can say that they are the most active databases around. Without DNS servers you would have to remember every server's IP address to be able to visit a particular site. The complexity of maintaining a DNS server further increases when in addition to getting billions of requests each day, the information keeps changing due to shifting of IP addresses, addition of new domains, servers etc.
Whenever a client machine requests a particular website by domain name, the browser looks up the DNS server of the ISP, which translates the domain name into an IP address.
As all the names of a given domain are unique and duplicates are not desirable, a central database is maintained that contains the information about each domain and the owner.
Because of so many possibilities and so many machines on the Internet, the DNS server is a distributed system to ensure that domain name management is somewhat more distributed if not easier.
The top level directory (.com, .net, .org) is maintained in the whois database of Network Solutions, a company entrusted with the task of maintaining this database. Similarly, top level domains such as .uk, .nl are maintained by the competent organizations of each country ( United Kingdom, Netherlands). Their may be entities that have thousands of machines on their network. They might want to maintain their own DNS servers, giving them greater control and flexibility directing user traffic (both internal and external). For example, a company called widget.com, with 100,000 computers on it's network, would want to control how domain names such as test1.widget.com, test2.widget.com resolve. Such entities or organizations setup their own servers, thus distributing the load off the central servers. There are many such systems worldwide, yet it functions in a single, integrated manner.
By setting up your own DNS server you become part of a hierarchy of DNS servers that make up the Internet. The Root server (represented by a dot) is at the top of this hierarchy, followed by top level domains such as .com, .net and followed by individual domains.
A domain is associated with at least 2 DNS servers:
The Primary or Master DNS Server: which contains definitive information about the domains that it serves and it supplies information for the domains based on the requests received.
The Secondary of Slave DNS Server: This gets all its information from the Primary DNS.
You can also setup other specialized types of DNS Servers such as:
Caching Name Servers: This type of server simply caches the information it receives about the locations of the hosts and domains. It will host the information it obtains from other servers till the information validity runs out as set by the Time To Live (TTL) fields.
Forwarding Name Servers: These servers do not contain definitive information about the domains it receives requests for but forwards it to other name servers.
Once you setup your own DNS server, you will be responsible for how domains translate into the IP addresse. In other words you will be responsible for providing the definitive data requested. This data will exist in the form of resource records. On receiving a request the DNS Server will send the authoritative answer bit in the packet that includes the reply. This AA bit indicates that the name server has the most current and up to date information about particular domain.