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I recently purchased the Sound Blaster Z and some high end headphones because of this, and I am truly converted on the importance of high quality sound, especially when you're dropping big dollars on your other computer components.
My question is, would I be better off using the build in DAC here, or my Sound Blaster Z and connect via Optical cable?
Your question is actually a great question.
Either connectivity is going to work for you..it really boils down to convenience.
If you prefer to have your primary control and customization through your Z control panel or the Sound Blaster Connect control panel is really what it comes down to and if you need a high Ohm headphone amp.
I personally use a Katana connected to a ZxR sound card via optical as I use the 600ohm amp (also on your Z card) to power my high-end power hungry headphones quite regularly.
Oh I noticed the DAC seems better on the SB Z now that I compare to the specs 24-bit / 192 kHz vs 24-bit / 96 kHz?