how do Challenges work?
It means exactly as you said. Daily chess is based on correspondence chess when people would post a letter (remember those). In practise people often move more frequently. 7 days is a limit. I play 3 day Daily, players will often make a couple of moves per day. The format is suited to people with families, jobs, and busy lives who dont want to play fast games but struggle to set aside time for a slow one.