The iPod volume control does affect the volume coming out of the iStreamer. By default, it's at the top, so the iStreamer puts out a 2.25 volt signal. But if you need a weaker signal going into your amp, it's great that you can reduce the volume.
At work, my current headphone amp is a portable and the 2.25 volt signal is too strong, causing distortion. Turning down the iStreamer volume a touch eliminates the distortion and the sound is great.
At home, in the bedroom, my integrated amp is 50 watts and my speakers are sensitive (92 dB). If I'm listening very quietly at night, the only way to get the sound quiet enough is to turn down the iStreamer volume.
The iPod is probably just sending a signal to the iStreamer to attenuate the analog output signal. Since the iPod is sending the iStreamer raw data, you can't reduce the "volume" of that data. But you can send extra info along with the data to control the volume once it's been converted into analog sound. It must work that way somehow.