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What really is DAC? When is DAC to be used?

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DAC is a connection dedicated to the SQL Server administrator, not to be used by normal connections to the database. This is useful because it allows the administrator to access the server even if there is some problem occurring on the server. He/she can then fix whatever is causing the problem. It is basically the same as a normal connection, but it is preallocated at startup and reserved for admins only.

For example, imagine that a busy production server suddenly stops accepting new connections. The administrator can use the DAC to log on to the server, see which app is using excessive connections, and perhaps kill some of the connections.

Microsoft has a brief description of DAC here.

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The DAC is a dedicated local connection that always has resources reserved for it. It is intended for situations when the DBMS has wedged to the point that it is not accepting network connections. You can use this to long onto the server and carry out troubleshooting or maintenance tasks.

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