The 12-time major victor led 5-2 in the opener, but Daniel fought back well to clinch the first set on a tie-break, and although Djokovic pulled level, 61 unforced errors from the five-time champion saw Daniel clinch victory after two-and-a-half hours.
Djokovic bowed out to South Korean Chung Hyeon in the fourth round of the 2018 Australian Open. The Swiss star finished a second-round match that was suspended due to rain Saturday night, completing a 6-3, 7-6 (6) victory over Argentina's Federico Delbonis.
Djokovic said he felt like it was his "first match" on tour and was unable to explain his opening set stumble or his capitulation in the decider.
While Federer was far from ideal, he did improve to an unblemished 13-0 on the year and took the next step in snaring his third title of the young season. It was the former world No.1's first match since returning from an injury, which forced him to undergo a surgery earlier in February.
Krajinovic had no answer for Federer's serve or relentless return game and ended up winning just 31 of the match's 93 points.
Kasatkina has beaten all four of the current Grand Slam champions in the previous year: French Open victor Jelena Ostapenko, Australian Open victor Caroline Wozniacki, Wimbledon victor Garbine Muguruza and now Stephens. "I mean, I had no expectations", said Djokovic.
Djokovic scrambled to win the second set on Sunday but the rust from the layoff was evident as he made 62 unforced errors overall.
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Daniel, speaking on the biggest win of his career, said, "It's kind of hard to describe.I can't believe I beat someone like that on the center court like this; it's insane".
"I was playing aggressive and feeling like he was not loving my slice, and then also mixing in with drop shots eventually", Federer said".
Daniel, who is ranked 109th in the world, advanced to the third round where he will face Gael Monfils of France.
The ex-world No. 1 says he is yet to find his rhythm in practice as well but is glad he recovered sooner than expected from his surgery and that he managed to get on a match court this week.
In other matches, fifth-seeded Dominic Thiem had to retire with an ankle injury while trailing Pablo Cuevas 6-3 4-6 2-4.
Marin Cilic is also through after a straight sets win over Marton Fucsovics 7-5 6-3 and Milos Raonic beat fellow Canadian Felix Auger-Aliassime 6-4 6-4.