A Digital to Analog Converter(DAC) is a device for converting a digital system's binary data to an analog signal. They use a resistor network, usually a R/2R network:

Schematic buildup of a R/2R DAC

                 R       R       R
                ___     ___     ___
URef --------*--___-----___-----___---------.
             |       |       |       |      |
            | |2R   | |2R   | |2R   | |2R  | | 2R
            |_|     |_|     |_|     |_|    | |
             |       |       |       |      |
             |       |       |       |     --- GND
             |       |       |       |
             O       O       O       O      ___
            /:      /:      /:      /:    .-___--.
           | : |   | : |   | : |   | : |  |  R   |
          ---: |  ---: |  ---: |  ---: |  |      |
             : |     : |     : |     : |  | |\   |   ANALOG
             : `-------*-------*-------*--*-|-\__*___OUTPUT
             :       :       :       :    .-|+/
            MSB      :       :      LSB   | |/
           |DB3_____DB2    _DB1_____DB0|  |
                       \  /              ---
                        \/
                    DIGITAL INPUT



    O                      |\            ___
   /:   digital switch    -|-\_ OPAMP   -___- resistor
  | : |                   -|+/
                           |/

The resistor network is called R/2R since it consists of resistors with resistance R and resistors with double of this resistance(2 x R, shortened to 2R). This acts as a voltage divider, dividing the voltage for each R/2R step. The switches is ofcourse not mechanical relays, but transistor circuits. The OPAMP is used as an inverting voltage-follower, This means that the output will have the same voltage as the input, but with the opposite polarity.

Example:
If the reference voltage(URef)= +10V, switching on only the MSB(Most Significant Bit) will give an output from the OPAMP of -5V, Only DB2 will give -2.5V, DB1=- 1.25, DB0=-0.625. If we switch on two or more bits their values will be added, DB3+DB0=-5.625V. This means we never get the full -URef and the minimum resolution is Uref/16(with four bits you can have 16 different combinations), but if we add more steps/bits we can get nearer, and control the output more accuratly.

Some DACs can use an AC source as a reference, and is used as for example a digital volume control. This DAC type is called Four- quadrant multiplying DAC.

There also exists DACs that can convert the input value to a voltage. An example of this type is the AD557, that will convert a 8-bit digital signal to a output with 0.01V per step, giving a controlled area form 0V to 2.55V.

The third type of DAC is similar to the voltage-output DAC but has a current output. DACs are used in many modern devices like CD players, computer sound chipsets and graphic adapters.