Location: Chat settings link in Administration > Modules > Activities
A daemon is a program that runs all the time in the background. In this case it's a PHP script, listening to a particular port on your server, accepting and giving out chat information.
If you intend to use the chat activity a lot, then you should consider using a chat server daemon to reduce server load.
1) Admin -> Config -> Modules -> Chat -> Settings
2) Set the method to "sockets" and set up the ports etc
3) Start the server like this (from the Unix command line):
cd moodle/mod/chat php chatd.php --start &
4) Go to a chat room in Moodle and open it as normal.
Forum discussion http://moodle.org/mod/forum/discuss.php?d=23198