DirectX 9 mostly has new features that DAoC doesn't use and your videocard probably doesn't support yet. It shouldn't hurt you to install it, but it's unlikely you will notice any difference unless they happened to fix some bugs as well.
As to what it does:
It's a communication layer between game and hardware. Games control videocard through it as well as soundcard and device input (joysticks, probably keyboard and mouse too). It also includes DirectPlay, which DAoC doesn't use, but is used by some games to implement multiplayer stuff
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