How to set properly DNS server on OpenWRT device?
Network > Interfaces > WAN > Advanced Settings
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To add some information to what @lleachii wrote, it is applicable to which nameservers dnsmasq is going to use to resolve. By default it is used by the system itself as well as the hosts connected to the OpenWrt. Lastly, it would be better to use the appropriate interface, from which the nameserver is reachable from. If you have a pihole in the lan, you should use custom dns servers under lan interface.
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Is this the same as adding dhcp-option 6?
quick question, I'm planning to add a raspberry pi with adguard/pihole on the lan, too.
Using a custom DNS server under LAN interface will be enough to filter? I have some Chromcast device that sneaks away or any IoT device will be force going into this DNS?
No, first is for upstream, this one is to advertise to dhcp clients.
You could hijack it, or block completely and wait until it falls back to your advertised nameserver.
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Why do you want to waste a raspberry pi on Ad-guard only? Instead, use Adguard as an add-on to Homeassistant, I am using that setup along with OpenWrt.
he did say adguard/pihole ....
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pi-hole add-on was deprecated due to some reason, which I don't remember. https://community.home-assistant.io/t/home-assistant-community-add-on-pi-hole/33817/502
With the prices of Raspberry pi sky rocketing and with no stock available, using it for a single purpose can be described as a waste of computing power.
this is latest price for Rpi 4 4Gb Pkr 40,000, i.e USD $ 197!!
AFAIK you don't have to use a RPi4 for the pihole, I probably have 3 or 4 of the gen 1 ones at home.
Still running mine on free oracle cloud hosts
How to set up that?
yes, if you really old rpi 1 or 2, you can use it as a single-purpose computer.
like on any other Linux.
I'm a little bit confused.
It is my understanding, that dhcp-option 6 tells a client what DNS server to use. If I do not specify dhcp-option 6, there is an implicit dhcp-option 6 with the router's ip for this interface.
If I specify Use custom DNS servers for the wan interface, the specified DNS server appears in /tmp/resolv.conf.d/resolv.conf.auto. If /etc/resolv.conf points to the latter file, the router uses the specified DNS server as upstream DNS server.
But what happens, if I specify Use custom DNS servers for the lan interface? Where does the specified IP appear, where is it used? Can you explain?
Correct
resolv.conf.auto will aggregate all the nameservers from all the interfaces.
resolv.conf by default points to localhost, where dnsmasq listens
Same as before, it will be included in the resolv.conf.lan and resolv.conf.auto, it will be used by dnsmasq as upstream resolver, and by OpenWrt and the clients through dnsmasq.
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if your router is powerful enough/has enough space you can install AGH in Openwrt. Theres an opkg version and a manual install. Then u can install ubuntu and docker on the Pi and install Plex Server on it. Instant netflix for the home 
Verified on a spare router with standard installation of OpenWRT 21.02.3.
Checked, too. /tmp/resolv.conf.d/resolv.conf.auto contains the following lines:
> # Interface lan
> nameserver 1.1.1.1
> # Interface wan
> nameserver 8.8.8.8
But there's no /tmp/resolv.conf.d/resolv.conf.lan. 
Okay, now I see the results of Use custom DNS servers in the specification of an interface.
In the past I used Use custom DNS servers only with the wan interface, if I don't want the DNS servers advertised by the peer.
Maybe I'm a little stupid (at least today), but I can't see any use case, where I specify a Use custom DNS servers other than the wan interface. Do you know such a use case?
Either I remember wrongly or it is not generated anymore.
A nameserver in lan, like pihole.
I just started following this topic as @mercygroundabyss pointed me here. I am also struggling in understanding dnsmasq and resolv.conf configurations for a different reason (AdGuardHome + dnsmasq).
Regarding your question above: I do have a use case, where I do my custom builds to be used as access point only. This build does not have dnsmasq, firewall, etc. I also delete the WAN interface. Therefore I use the lan DNS custom server to allow OpenWrt internet access. The custom lan dns is correctly saved to /etc/resolv.conf which enables internet access to the access points.
No problem, nobody is perfect. 
Okay, but what is the difference specifing it under the wan interface? In both cases the DNS entry appears in resolv.conf.auto.
Okay, because of the missing wan interface you are forced to specify the DNS entry under another interface (in your case the lan interface). That makes sense, to use Use custom DNS servers in an interface other than wan. Thanks for your example.
Why do you need internet access for your AP? Because of the missing dnsmasq on the AP, the AP's clients must get their DHCP information (gateway, DNS server etc.) from your router.
I see no need for internet access for your AP and therefore no need for a resolv.conf. Or did I miss anything?
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