What is the Chemistry behind making Dahi yogurt?

Dahi is fermented whole milk induced by live bacteria.

There are basically 4 steps involved in making Dahi yogurt

Step 1: Restructuring proteins

In milk there are two types of proteins: Casein, and Whey. When the milk goes sour, it curdles. The coagulating part is Casein, and the watery substance is whey.
We have to heat milk to 200º F to change the structure of both the Casein and Whey. The Casein develops ridges all around, and the whey becomes elongated. Now when the acid is introduced, Casein traps the whey giving it a smooth texture. The watery part is not separated.
Normal pasteurization process is not sufficient to make these changes. Ultra-high pasteurization process does achieve this goal.
At home, You can achieve this by heating milk to 200ºF.

Hold at 200°F for 10 minutes for thinner yogurt

Hold at 200°F for 20 minutes for thicker yogurt

Do not boil. Be careful and stir constantly to avoid scorching.

Adding non-fat dry milk to hot milk will coagulate proteins and form strings. Add sugar or honey to lessen yogurt tartness.

Step 2: Cool down and add Culture

Now, we have to cool down the milk before introducing the starter culture. The culture remains active between 98ºF and 120º F. The ideal temperature is 115ºF. The culture starts to die when the temperature is over 125º F.

Let the milk to cool to 112°F to 115°F.

Remove one cup of milk and and whisk in starter culture. Add it back to warm milk

The temperature of the mixture should now be 110°F to 112°F.

Selecting the starter culture

Earliest known culture is "Kumiss". It was used by Mongols and found its way to India during the times of Genghis Khan. In Russia they use "Kefir". The strains in Kefir cause yogurt to become effervescent. The Greek Yogurt contain "Leban".
In India, a combination of "Lactobacillus bulgaricus" and "Streptococcus thermophilus" is used for commercial production. This is closest to Kumiss. You can find this combination in almost any Health food stores in United States.
Sometimes, a combination of four strains is used to create milder flavors (Lactobacillus bulgaricus" and "Streptococcus thermophilus", "Lactobacillus acidophilus" and "Bifidobacterium"). "L. acidophilus" is added by most of the commercial manufacturers including Dannon, Columbo, Yoplait and Breyers.
"Pima" is used as a culture by some packers to produce fruit flavored creamy yogurt. Pima is NOT derived from milk.
I use Dannon Natural Plain yogurt with live culture as a starter.

Step 3: Incubation

Now, we introduce the starter culture to the milk (¼ cup per quart of milk). There is a sugar called Lactose in the milk. The culture starts to change the lactose into lactic acid. The lactic acid causes Casein to coagulate slowly, trapping the whey. If the coagulation process is fast, the Casein just clumps up curdling the milk. That's exactly what we do by introducing acid to milk at high temperature to make Paneer.
The ideal temperature is 115º F degrees to incubate.
Let us look at the starter culture. The starter culture has two types of bacteria; Streptococcus, and Lactobacillus. There are various strains of these cultures with different characteristics. In general the optimum growth temperatures are as follows:
Streptococcus: 110 to 115º F
Lactobacillus: 95 to 105ºF
The actual temperature can be up to 120º F while making Dahi.
The Streptococcus will convert the lactose to lactic acid changing the pH level from 6.6 to 4.6.

Incubate for 4 to 7 hours at 110°F ± 5°F

Yogurt should set firm when the acid level has achieved pH 4.6.

If the milk is fermented too long it will turn sour.

Now, we can turn the heat off and put the fermenting milk in the refrigerator. The Lactobacillus will continue converting lactose to lactic acid till the temperature reaches 41ºF, at that time Lactobacillus will become dormant. The temperature will drop from 115º to 41ºF in about 2 hours. Lactobacillus gives the aroma to the Dahi.
In summary, we should incubate at 115º F for 3 to four hour, and then we should remove the heat, put the fermenting milk in the refrigerator or at room temperature for an additional 2 to three hours.

Yogurt will keep good up to 3 weeks in the refrigerator at 40°F or lower.