Let me explain something a little different way, and see if it helps. All modern sound systems have essentially five major component parts:
- source components (turntable, cd, blu-ray or tuner)
- digital processor (DAC or surround chip to convert a digital signal to analog for digital sources)
- preamp (source switching and volume control)
- power amplifier
A surround sound receiver is #s 2, 3 and 4 all in one box usually including an am/fm and/or a digital tuner. Depending on the connections on the rear of the receiver you may or may not be able to separate these functions. Your receivers have both digital and analog inputs and outputs. They do not have a true power amp input which would allow you to use your receiver as a power amplifier.
Usually, when you use the preamp out for a particular channel, the receiver turns off the internal connection to the related power amp channel so it does not waste valuable power on that amp channel when you are not using it. This allows you to use your receiver as a preamp, bypassing the internal power amps, which are usually the weakest part of the receiver because they are the largest drain on the single internal power supply in the receiver. Most receivers rate there power amps with two channels driven, not all 5, 7 or 9. Your Denon is probably only 70 to 80 watts per channel with 5 or more channels being driven. Denon is not brave enough to publish those numbers. That being said, even the S300 will be a significant upgrade from the internal power amps.
The Stellar Gain Cell DAC is two components in one box, a two channel DAC and a preamp. The Home theater mode is somewhat like the multi channel input on your receiver in that it allows a pass thru mode allowing you to use a single volume control to control all the channels in your surround system, and not having to “match” two volume controls. This is a two channel version of your multi channel input. You are still using the volume control to an extent, but with the way the Stellar is engineered and works, you are minimizing any negative outcomes.
Most multi channel inputs still use the volume control of the receiver to control output. You could test this by playing a movie and ramping the Onkyo volume up and down to see if it is a true pass through, your left, right and center channels will NOT go up and down separately from the surrounds. Try turning the Onkyo volume all the way down, and see if you still get sound through the three front speakers.
Multi channel inputs were developed so you could use the surround output directly out of a blu-ray player that might be more advanced than the surround processor in your receiver. Manufacturers know you will have to change out a disc player more often than your receiver because they are not built to last as long. This is so your receiver does not become obsolete as new surround modes are developed.
Your assumption is correct, you are not using any digital to analog processing in your Onkyo when you use the multi channel input. HDMI, Optical, USB and coaxial digital ins and outs are digital signals and must go through a DAC or Surround Sound chip (Multi channel DAC) before being sent to the preamp and power amp section of your receiver.
By trading in your Onkyo you can still get value from it. You can research PS Audio’s policy on this website and call them during business hours to talk about your specific situation, you might be able to get both at once. The SGCD/ 300 combo might only be a few hundred dollars more than the SGCD alone. You would not be wasting any money, because once you discover what a “real” power amplifier can do for you, you will want a pair of 700’s to drive your front main speakers, you then use your preamp outputs, and move the 300 to other channels such as your rears or bi-amp your center channel (one M700 per channel Left, Center and Right would be the best eventual goal and a S300 per pair of surrounds.)
Now let me address your subwoofer situation, now that I know what you have. Since you have two different subwoofers, you should not use them in a left and right stereo pair configuration with your main speakers. You can use one of them (the better one) for the low frequencies on your left an right main speakers a couple of different ways. For both connection methods you set the surround sound set up on your Denon to full range main speakers, which will send a full spectrum signal to the front outputs.
You can then either use paralleled speaker level inputs from your power amp (Onkyo), or the single ended line level outputs on the SGCD, (essentially what you are doing now) or the balanced outputs would be used once you get a S300 or pair of M700s. You would use both the left and right channel inputs of your subwoofer in either case, not the mono you are probably using now. Paul has a good video on the website explaining his opinion on subwoofer integration.
Any of these configurations will allow you to use a subwoofer in two channel or surround listening situations.
You would use your second subwoofer as the rear channel subwoofer by changing your rear channels to full range, and paralleling speaker level connections.