Where does the DAC go?

If there is a digital output, the chances are that you might be able to improve upon the ROKU's internal DAC (not a far stretch to do as much, but just an educated guess on my part - I have no direct experience with ROKU to back up my assumption, but I think it's a fairly obvious conclusion). To use an external DAC you would run a wire from the ROKU's digital output, which would be one of several different types of interface (Most likely TOSLINK, RCA, or BNC - all of which are S/PDIF connections, the former is optical and the later two are coaxial). Yes, you would probably get better sound assuming you get a decent DAC.

It goes between the player and the amp.

Complex answers to simple questions is what makes audiophiles amusing to the general population.

For anyone who is new to digital audio, an answer like that one to the question posed by the OP would leave them with very little additional understanding to the question they were asking as before the enlightenment provided by your reply. In a forum like this usually folks are just trying to be helpful. I'm at a loss of why that would amuse the general population, but glad they're enjoying themselves.

Kal's words ring true to me. Well, I'd expand on 1. and say that you really don't "need" any of this stuff. I think that goes without saying and none of us would be here if we didn't "want" something more. That said, there are plenty of threads on budget DACs to search out. The good news is that digital tech has advanced at such a rate that you can get a lot more for your $ than say, 10 years ago. The answer to your question is, of course, relative to what you consider decent, and how well your system will respond to your "better" version. I could only guess that an audible improvement on a resolving system is easily in the $500 range and even less, though I don't know the threshold where your investment will not meet with your personal expectations. Plenty available in the 400-600 range that will likely best the DAC in the ROKU (again, an educated guess on my part). Candidates in that range that I'd recommend: PS Audio DLIII and the MHDT Labs Paradisea +. There are others, for sure. But per the sage advice from Kal, consider the rest of your system (just how well it might bring out the differences you are seeking) as well as your own expectations of what "better" is worth in dollars invested.

System: Cary Audio Design SLI-80 cranked up to F1 specs (and more) by/at the factory running Genalex Gold Lion KT88s, NOS Tung Sols and RCAs for preamps, AP Virgo IIIs, all custom solid silver ICs and speaker cables, Tice power conditioner; analog end is VPI Signature Scoutmaster and Benz Glider S lo output, Phonomena phone pre, couple of Shunyata power cords in there somewhere...

What streams? Like, MP3, AAC, WMA?

I kinda knew going in that this ROKU may be a little bit, um, underwhelming vis-a-vis the rest of the rig, but for $100 i figured it would be a start

A system like yours would certainly benefit from a better DAC than the Roku, IMHO.

I think you might be asking what file convention to rip your files in, which is certainly a good question. The answer is highly debatable, but I tend to prefer the lossless options which include WAV (I'd avoid this for type for the lack of metadata support - trust me on this one), AIFF, Apple Lossless, FLAC. I believe the three you suggested are all compressed file types (someone correct me if I'm wrong). You should also be selective about the software you use to rip those files (I'd avoid itunes and go with something like MAX for Macintosh, and there are many choices for PC like EAC or MediaMonkey - not much experience with PC's myself)

I thought the ROKU was marketed primarily to stream video, and did not have as well implemented an audio/digital section as something like the Squeezebox Touch. The latter has pretty decent jitter specs on the digital out. I'm not familiar enough with the ROKU to really comment beyond speculation so I'll leave it to others.

Oh, if you are just using it to listen to low-res internet radio streams then my comments do not really apply. I don't know how much you'd gain by a better DAC in that case as I have no direct experience to share. I don't listen to Internet radio enough to have an opinion one way or the other.