Official dollarization goes further than a currency-board: there is no domestic currency to defend because there is none. Panama has used the dollar for over a century, Ecuador adopted it in 2000 and El Salvador in 2001, in each case after a domestic currency collapse.
The trade-offs are stark. Inflation and exchange rate risk largely disappear, and borrowing costs usually fall. In exchange the country gives up monetary policy entirely, gives up the lender-of-last-resort function in its own money, and loses seigniorage to the issuing country.
Unofficial dollarization is more common: citizens price property, save, and eventually invoice in dollars while the legal tender continues to exist. It typically accompanies capital-controls and a parallel exchange rate.
Example: an economy where 70% of bank deposits are held in dollars has already dollarized in practice. A 30% devaluation then hits only the minority of balances still in local money, while local-currency wages buy 30% less.
Related: currency-board, capital-controls, reserve-currency, emerging-market-currency