I think that the $400 DacMagic paired with a midfi preamp (altogether, less than $1k) would sound better than a $3k DAC that uses a digital volume knob.
You're thinking is way off. It simply is not possible that the $400 DacMagic paired with a midfi preamp could ever sound as good as the PWD. I assume that you have not heard the PWD for yourself and are merely speculating. If you have the opportunity, listen for yourself
There is no loss in the upper 50 percent of the digital volume with the PWD used as a preamplifier. That said, I prefer to use a preamplifier with the PWD volume set at 100 percent.