DSD capable DACs are able to decode DSD file formats (such as DSF, DFF or DSD ISO) to analog without conversion to PCM. One must feed these files to a DSD DAC using a computer running appropriate software (JRIVER, HQPLAYER…) thru USB, firewire or LAN connections. These music files can be obtained either by buying from music download sites or ripping from your own SACDs with a special version of a PS3 loaded with SACD ripping software.
Some who prefer their music decoded with a DSD DAC also upsample their PCM music library (wav, flac, ape…) to 2xDSD or even 4xDSD (if they have a 4xDSD capable DAC) although one would need a powerful computer to do the 4xDSD upsampling.
Personally, I have an 8 year old computer that can do PCM upsampling to 2xDSD without sweat.
Check out this article with lot more infomation:
http://www.theabsolutesound.com/articles/the-abcs-of-dsd-downloads/Best, Gigi