David, most of the DSD source material available is DSD64, there is a little DSD128 out there and almost no DSD256. Where the advantage of these higher rate formats comes in today for the most part, is how good these modern DACs can sound processing it.
Where there is a big buzz about these higher rates, is up-converting other formats to them and playing them on a DAC like the one you are buying. I convert all my material to DSD128 as it's the highest my system can support at this time. To move to DSD256 or DSD512, I'd need a more powerful player PC, upgraded streaming appliance (at least linux based ASIO drivers) and DAC - not something I'm ready for and DSD128 sound incredible so I'm good.
If your send the DAC DSD128 files and convert on-the-fly or pre-convert, there is no difference in the processing to the DAC - it's receiving the same file in the same way and does it's thing. The difference between on-the-fly and pre-conversion is that you store your files in their native format with on-the-fly and the player PC needs the stones to do the heavy-lifting of conversion at time of playback - much easier on the player computer to simply play a pre-converted file but then you had to do that conversion someplace so not sure if this really leaves you off the hook on PC balls. This is all about the player PC though - nothing to do with the DAC at time of playback.
Where the real advantage to on-the-fly comes in is software choice - and I feel the high-water mark for conversion software right now is HQPlayer which is particularly good at this - and is the main player when people talk of what DSD256 and DSD512 is capable of - with any source material. The thing is though, this ONLY works on-the-fly and requires some MAJOR computer horsepower - the true bleeding-edge of this pursuit.
:yes: 
