Your ears don't listen to digital signals or encrypted sound waves (they can't decrypt it). So, how do you go from digital signal on a Lightning cable to actual sound waves for the human ear? They convert the signal, obviously, somewhere along the line. The DAC is in the headphones now, instead (presumably, similar to every other bluetooth headset since forever, I suppose.)

The analog output can never be removed from the chain, so to speak. This is the "analog gap", and also why it's not really sensible or possible to "encrypt" physical audio signals in a manner to prevent people from copying them, when the copying-person is also the intended recipient of the end-result.