I remember back in the mid 90's in IASCA a few of the top cars started to show up with outboard DAC's. The main problem with them was controlling the volume, you had to have something after the DAC to modulate it. Some used dedicated volume controllers which did 3 or 4 channels simultaneously. It was kind of crude.
I'm guessing that the SPDIF signal does have a portion that tells the processor (Alpine 700) what volume it should be, but I dont know, I'm just guessing.