cdemu-daemon receives SCSI commands from kernel module thorugh the VHBA module and processes them, passing the requested data back to the kernel. The daemon implements the actual virtual device; one instance per each device registered by kernel module. It uses libmirage for the image access (e.g. sector reading).
The daemon registers itself on D-BUS's system or session bus (depending on the options passed to it) where it exposes an interface that can be used by clients to control it.