Can someone explain why this DAC offers a power supply that is bigger than the unit itself?
Size, "form factor." P1 PSU is same L and W as M8 DAC and V2 headphone amp. H is more because of the transformer coil.
I don't understand why some highly-regarded DACs are tiny and run off a basic wall wart or even just USB
USB for portability and convenience, desktop use with "computer speakers"/desktop speakers.
Price point.
Look at the size and shape of "wall wart" transformers/PS compared to the size of small DACs.
This way, modular, we are not limited to a built-in/integrated PSU. (How important PS is in hi-fi audio generally is a whole 'nother story.)
In this case, the M8, it is not portable because it is not USB-powered.
Look at the cost and the price point. Integrating the P1 PSU into the M8 DAC would mean approx. 80% higher price. (And about 3x the height - or approx. 50% wider, and they wanted to have the same matching length and width.)
"Higher-end" DACs with built-in PSU are more like the typical size of amps and CD players and so on. (And price from about $600, $1000 up.)
Is it because the included adapter is terrible?
No, the included PSU is just a typical generic thing.
Would buying a generic but higher quality adapter also improve sound quality?
No. Or possibly/theoretically, but i don't know how you'd be sure about generic but higher quality. Possibly/theoretically at best because they're all basically the same design. The P1 is a linear power supply...costs more, is more stable, less noisy.
Is the M8 made in such a way that is incredibly susceptible to power supply problems, or would any DAC also benefit from something like the P1?
No, it is general/typical.
Yes, any DAC (aside from $$$$ DACs with expensive built-in PSU.) Amps and so on generally too. PSU is key in amplifier designs.
PS: Read back from here - same topic, sheds more light. (And - in my opinion - why the SMSL M8 is better if you're not buying a $$$$ DAC.) http://www.avforums.co.za/index.php/topic,46494.msg608379.html#msg608379