As far as I can see TotalRecorder is just a vanilla virtual WDM audio driver, which is not signed by WHQL. This means it won't work with (certain kinds of) DRM'd audio, despite their claims, although it will work just fine with non-DRM'd audio.
No, its not just that. They give you two options on how you want to run, using a "virtual driver" as you described or by using their "kernel mode filter driver". This second method doesn't required that the application send its audio output to a virtual driver, it captures audio from any audio system you send to.
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