DMToolbox is used to shrink GC game images. Basically, taking out garbage data so they have a smaller size.
GameCube games were stored in Mini-DVDs, which have a size of around 1.4GB, but many of the games themselves weight much less. Games such as Luigi's Mansion or Wario World use less than a quarter of the total space, and games such as Animal Crossing take even less.
Shrinking games saves up space, which lets you put more games in your device. Not every game works when shrunk, but the vast majority do.
In the
compatibility list here in GBAtemp you can check the few games don't work with this, and show you the final size of the many that work well when the garbage data is removed. As you mention, it also places the resulting game image in the correct folder of your device with the correct name for its use with Nintendont; it's useful.
