Which DAC works best for PS3 and is it posible

If it has a digital out, then yes you can hook it up to a DAC. As to what DAC, it is a matter of opinion/choice.

The PS3 can downmix multi-channel digital audio to 2 channel and send it out to the DAC of your choice. But in my system, the downmixes generally sound crappy - not the quality of the sound, but the center channel gets so buried in the mix that it can get overwhelmed by other stuff in the mix, and I have to constantly fiddle with the volume. YMMV and all that!

PS3 color superior to many expensive bluray players???? Lets not believe everything we hear.

Macallan...

View my virtual system for information on my PS3 setup.

I do run a 2-channel setup out to a Cary Xciter DAC. It is impressive. Impressive enough that I started to venture off to other little tweaks versus upgrading speakers and components that weren't necessary. I use the optical output as well. I've found it to be quite resolving. You may have to fiddle with your audio output settings a bit but it will work just fine. And Blu-ray? Holy cow is it impressive, even on two-channel. Just get a quality Toslink cable. For any specific questions on how I set my gear up you can email me.