Composed of several gears and other parts, the differential on a radio controlled vehicle is a small unit that sits inside the wheel base and is attached to the driveshaft. The differential unit transfers power from the input shafts to the output shafts giving the outer tires more power, allowing them to spin faster than the inner tires during the duration of the turn.
The open, adjustable, and ball differential are the main types of differentials used in radio controlled vehicles. Not all RCs use a differential, relying instead on solid axles, ball bearings, and other methods of compensating for the wheel differences in making a turn.
See this article on Model Car Differentials from RCTek.com for illustrations, animations, and explanations of what differentials are, how the work, pros and cons, and alternatives.

