What does this do?

I have never used it but I see it as a solution for DHCP/DNS problems and I do not understand why I get along without it but it seems so important.
I just use 'Use custom DNS servers' to point to my pi-hole's ip address and DNS is forwarded to it.

This is dhcp option 6 which is the advertisement of DNS servers to DHCP clients.

If left unspecified, option 6 will be sent automatically and will advertise the router's address as the DNS server. However, when explicitly specified, it will send the desired nameservers.

This does not guarantee that a client will use the advertised DNS servers. Many clients will use it, however some may be hard-coded to use another DNS and/or may have user-overrides (at the client level) to select other servers.

But yes, if you use Option 6 to send your PiHole's address, it would be expected that your clients would then use the pihole as their nameserver.

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What you did is LAN wide, use the option 6 if you need force DNS for specific hosts.

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