The primary purpose of the AppDomain is to isolate an application from other applications. Win32 processes provide isolation by having distinct memory address spaces. This is effective, but it is expensive and doesn't scale well. The .NET runtime enforces AppDomain isolation by keeping control over the use of memory - all memory in the AppDomain is managed by the .NET runtime, so the runtime can ensure that AppDomains do not access each other's memory.
Objects in different application domains communicate either by transporting copies of objects across application domain boundaries, or by using a proxy to exchange messages.
MarshalByRefObject is the base class for objects that communicate across application domain boundaries by exchanging messages using a proxy. Objects that do not inherit from MarshalByRefObject are implicitly marshal by value. When a remote application references a marshal by value object, a copy of the object is passed across application domain boundaries.