I know very little about DLL's and LIB's other than that they contain vital code required for a program to run properly - libraries. But why do compilers generate them at all? Wouldn't it be easier to just include all the code in a single executable? And what's the difference between DLL's and LIB's?
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Another aspect is security (obfuscation). Once a piece of code is extracted from the main application and put in a "separated" Dynamic-Link Library, it is easier to attack, analyse (reverse-engineer) the code, since it has been isolated. When the same piece of code is kept in a LIB Library, it is part of the compiled (linked) target application, and this thus harder to isolate (differentiate) that piece of code from the rest of the target binaries.
A DLL is a library of functions that are shared among other executable programs. Just look in your windows/system32 directory and you will find dozens of them. When your program creates a DLL it also normally creates a lib file so that the application *.exe program can resolve symbols that are declared in the DLL.
A .lib is a library of functions that are statically linked to a program -- they are NOT shared by other programs. Each program that links with a *.lib file has all the code in that file. If you have two programs A.exe and B.exe that link with C.lib then each A and B will both contain the code in C.lib.
How you create DLLs and libs depend on the compiler you use. Each compiler does it differently.
One important reason for creating a DLL/LIB rather than just compiling the code into an executable is reuse and relocation. The average Java or .NET application (for example) will most likely use several 3rd party (or framework) libraries. It is much easier and faster to just compile against a pre-built library, rather than having to compile all of the 3rd party code into your application. Compiling your code into libraries also encourages good design practices, e.g. designing your classes to be used in different types of applications.
One other difference lies in the performance.
As the DLL is loaded at runtime by the .exe(s), the .exe(s) and the DLL work with shared memory concept and hence the performance is low relatively to static linking.
On the other hand, a .lib is code that is linked statically at compile time into every process that requests. Hence the .exe(s) will have single memory, thus increasing the performance of the process.
Source: Stackoverflow.com