Acronym for Dynamic Host Configuration Protocol.
It allows machines to configure their own network settings by querying a server about the details of the network. Thus, you can make global configuration changes like renumbering your network in a central place, rather than having to change the static IP of every single host separately. You can still give machines static IPs with DHCP by binding IPs to MAC addresses.
DHCP is not restricted to giving machines IPs. In fact, it can be used to configure a huge number of network related settings. Two such settings commonly configured via DHCP are the gateway and DNS server addresses for clients to use.
See also DHCPNotes