If on LMS end the player volume is locked at 100% and you can confirm
using logging (e.g. player.source) that streams are played direct to
player,  then the issue is most likely to be in the player setup as LMS
has been shown to be able to play bit perfect stream for other formats.

I know nothing about MQA or Dragon Fly DAC but I do know how choices of
devices and settings on Pi USB can result in unwanted processing.

You should summarise your setup on the PI.

The OS.
The squeezelite command line 
and the "alsa-capabilities" output for the selected output device


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