DMC is short for "damage cancel". It happens on all version of PSO to some degree all the way back to the GameCube version (I am not familiar enough with Dreamcast V1 / V2 to talk about those versions) and is related to the way the server receives incoming damage packets from the client(s). While not a bug, there's varying degrees of intensity of DMC among the existing servers. I personally use GameCube as a metric for what it's supposed to feel like. However Ultima has the worst DMC of all the servers I have played on to the point where you could call it a bug. It's completely nullified on Ultima when more than one person attacks the same enemy and it's beyond annoying.
Pretty much every combat action can cause DMC on Ultima. Normal, hard, and special attacks, traps, techs including Zalure / Jellen. There's solutions for this that for one reason or another haven't been implemented on Ultima. There will always be some limitations when it comes to a "DMC patch" (as it's called on Unseen / Ephinea) such as two players starting a Charge Vulcan combo at nearly the exact same time. Some amount of damage in that situation will be cancelled on those servers, but not whole combos like here. I can't speak too much for the Ephinea DMC patch, but it's probably nearly as good as the Unseen patch that doesn't have damage cancel on traps, techs (including Jellen / Zalure), and instead of actually canceling attacks that are done at the exact same time it just accepts the higher damage numbers and cancels who ever is weaker, but if the attacks are staggered at pretty much any time interval it will accept both damage sources. This is a little more robust than the way GameCube works, but GameCube pretty much just has restrictions of waiting the slightest bit of time between these actions to avoid cancelling damage. However, it's a lot easier to "wait" that time there because characters move slower (walk before run) as well as attack slower (25% attack speed boost only)