The Daytona AWS Provider allows users to create and manage workspace projects on Amazon EC2 instances, integrating with AWS for a scalable and flexible cloud environment. To use the provider, an IAM user with AmazonEC2FullAccess permissions is required, which grants necessary permissions to manage EC2 instances. The setup process involves creating an IAM user with programmatic access and assigning the AmazonEC2FullAccess permission, installing and configuring the Daytona AWS Provider, setting up AWS targets, including configuring access keys, instance type, region, and more. Common issues that may arise during setup include invalid AWS credentials, insufficient IAM permissions, EC2 instance launch failures, and region-specific issues, which can be resolved by checking for known issues or updates, verifying access key and secret credentials, updating IAM user permissions, ensuring correct instance type and AMI ID configurations, and checking if the service or instance type is available in the selected region.