A Data Transfer Object is an object that is used to encapsulate data, and send it from one subsystem of an application to another.
DTOs are most commonly used by the Services layer in an N-Tier application to transfer data between itself and the UI layer. The main benefit here is that it reduces the amount of data that needs to be sent across the wire in distributed applications. They also make great models in the MVC pattern.
Another use for DTOs can be to encapsulate parameters for method calls. This can be useful if a method takes more than four or five parameters.
When using the DTO pattern, you would also make use of DTO assemblers. The assemblers are used to create DTOs from Domain Objects, and vice versa.
The conversion from Domain Object to DTO and back again can be a costly process. If you're not creating a distributed application, you probably won't see any great benefits from the pattern, as Martin Fowler explains here.
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