That dock connector has 30 different pins on it. Each pin has a different function. Theres a couple pins meant specifically for USB power, one meant for usb Tx, one meant for usb Rx, one meant for ground. Theres some meant for LINE OUT, which is what the LOD's do. They connect specifically to those LOD pins so that the ipod's internal volume control stuff gets "disabled". That is why if you plug your ipod into a dock, you never can use the clickwheel to control the volume.
The Cypherlabs Algorythm Solo, Fostex HP-P1, and NuForce Icon iDo all use that same dock CONNECTOR, but the inside of that connector is wired differently. Essentially, what those products are doing is reading the actual encrypted file on the ipod, unencrypting it (the same way itunes does), sending it through the product's OWN DAC chip, through the product's own op-amp and volume control, and THEN out of your headphones.
Think of the DAC's as plugging your ipod into your computer and using itunes to play files off of the ipod itself.