It used to be common for this to be done by the sound card hardware itself, but once CPUs got fast enough it all moved to software to save manufacturing costs and number of sounds being able to be played concurrently limitations. Plus its all limited by the Windows mixer (which HAS to mix the many different sounds playing at any given time into two-channel stereo to output over optical) which is far from optimal, some sound cards I believe bypass this with their own implementation which again can improve sound quality. However if you are using EQ or other effects (eg encoding to surround sound), it may have some impact, although its probably more likely all that is happening in software and its merely the difference between the on-board sound card drivers and the USB ones. Its my understand that with optical out it effectively is bypassing the sound card entirely, that's kinda the point.
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