Alpha hydroxy acid (AHA) extracted from milk, although most forms used in cosmetics are synthetic because that form is easier to formulate with and stabilize.
In a pH-correct formula (generally a product would have a pH between 3 and 4) and in concentrations between 5 and 12%, lactic acid exfoliates on the surface of skin by breaking down the material that holds dead skin together, allowing it to shed naturally as it once did. Lactic acid may cause sensitivity, although this isn’t common and can be minimized, if not eliminated, if the formulation contains soothing ingredients.
Lactic acid also has hydrating properties and, like glycolic acid (another AHA), helps brighten an uneven skin tone.
Reference for this information:
Journal der Deutschen Dermatologischen Gesellschaft, 2012, issue 7, pages 488-491
Clinical, Cosmetic, and Investigational Dermatology, November 2010, pages 135-142
Journal of the American Academy of Dermatology, September 1996 pages 388-391
Archives of Dermatology, June 1996, pages 631-636