You can read all about it from ESS here:http://www.esstech.com/files/3014/4095/4308/digital-vs-analog-volume-control.pdf Long story short...they use 32-bits, so thus improving the ENOB. That's their story anyway.
Have you seen this presentation? http://esstech.com/files/3014/4095/4308/digital-vs-analog-volume-control.pdf
Ti Kan from AMB audio implemented digital volume control for his Gamma3 DAC and he claims he can't tell a difference.
Cheers chaps. I've not been able to hear any degredation with the ESS volume in my dac (whereas the Squeezebox Touch volume is bloody awful).
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