According to the DYN4 manual, by setting Electronic Gearing to maximum value, one step pulse will move the motor 1/65,536 of a full revolution which indicates that internally it does actually utilize the full resolution of the 16 bit encoder. An interesting question then would be, what is the output of the emulated encoder during this one step pulse?
My speculation is there will be NO change on the emulated encoder output during this one step pulse due to the fact that the emulated encoder max pulse per revolution is 8,192. This implies that if an outside controller uses the DYN4 in torque mode and relies on the feed back from DYN4 emulated encoder, it will not be able to do such a 1/65,536 of a revolution move and will be limited to 1/8,192 of a revolution move.
In my case I'm planning to use a direct driven 20mm screw. The theoretical linear resolutions will be 2.4um and 0.3um for the 8,192 ppr and 65,536 ppr encoders respectively. That's an appreciable difference! besides, I want to keep the linear positional resolution of the encoder well below the positional inaccuracies of the mechanical components (apparently this improves system performance). I'm planning on a more rigid system by direct driving the screw.
This all comes back to the fact that I want to utilize the DYN4 in either position or speed mode to get the full benefit of the 16 bit encoder by keeping all or part of the servo loop running inside DYN4. But in torque mode I will have to run the servo loop completely outside the DYN4 and depend solely on the emulated encoder less resolution output which I don't prefer. To get what I paid for, you know!