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DI's perform three main functions: Impedance conversion, balance
conversion, and ground isolation. And although it is also used in
the reverse; most often what happens is that an unbalanced,
high-impedance (hi-Z) signal is converted via the DI to a
balanced, low-impedance (lo-Z) signal.
Of course i'm looking at this from the perspective of a guitar player
*only*, so...
In addition to those three main functions, many DI's also include
among other things:
Phantom power (power from a mixer); ground lift;
pad/buffer/attenuation; parallel output; phase inversion, and equalization.
Impedance Conversion
Whether you're playing electric or acoustic guitar, your (passive)
magnetic pickups are generating a hi-Z signal and this can be a problem
in two ways:
1. When plugging directly into a mixer channel that is wired for a lo-Z signal,
the mixer will "load" your pickup(s) leaving you with a sound that is
thin and unpleasing (understatement).
2. When trying to send that signal any substantial distance live or in
the studio, it will be subject to degradation due to signal loss.

mixer channel strip
Typical uses for hi-Z to lo-Z conversion with guitar are:
1. Where an acoustic guitar amplifier is unavailable, DI conversion
allows you to plug an acoustic guitar directly into the mixer without the high or low frequency loss.
This works with magnetic soundhole pickups, undersaddle transducers, and
soundboard transducers.
2. Where even a processed (POD, V-Amp, etc.) electric guitar signal is
to be sent a great distance to the mixer (or a short distance in the bar
with neon lights and all of that), DI conversion to a lo-Z signal can
mean almost no signal loss.
3. In the studio electric (and acoustic) guitar & bass performances are
often recorded dry
via the DI in order to be re-amped later. When re-amping
outside the computer, conversion is often 'reversed' (lo-Z to hi-Z).
Balance Conversion
Balanced signals have quite the advantage over unbalanced signals when
it comes to noise rejection in less-than-perfect environments such as
the bar or for long cable runs. This is due to the design/shielding of the balanced cables themselves, which have three
conductors arranged so that two carry the signal and one
surrounds them as a shield.

three-conductor microphone
cable
Not only does the braided conductor do an extremely good job of
shielding versus a standard unbalanced (two-conductor) cable, it isn't
dependent upon being connected at both ends, which means the ground can
be "lifted", helping to eliminate ground-loop problems live and in the
studio.
Typical uses for balance conversion with guitar are the same as for
hi to lo-Z conversion. Balanced lines help combat signal
degradation that would otherwise have been caused by poor EMI & RFI
rejection.
Ground Isolation
People have been discussing this since long before my first involvement
with music/audio more than 30 years ago: The only way to completely
avoid having the audio signal affected by ground loops is to have an
entirely balanced system connected to a properly wired AC
service. That's right; no unbalanced (guitar) cables or wall wart
power supplies. If only that were possible.
Ground-loop problems in the form of an audible hum can be complicated to
reign in because you have all of this equipment that is tied together
via audio signal *and* connection to AC; and it is all wired
differently.
Most balanced gear (like a mixer) has two grounds: a signal ground,
and a chassis ground. Even though the chassis might be connected
via the metal racks in a case (for example), in theory this would still
leave the audio signal unaffected. In the real world
though, many pieces of balanced gear have their signal and their chassis
ground connected somewhere in the unit, and most unbalanced gear will
have the same (if it has chassis ground at all).
Sometimes the use of a DI might itself be enough to get rid of a
ground loop problem, but usually it's the Ground Lift that
ends up doing the trick.
Phantom
Power & Ground Lift
An active DI needs power. It can come in the form of a 9 volt
battery, or it can take phantom power from the mixer. It seems
like this would be a no-brainer because batteries are so expensive, but
the problem though is that some mixers aren't capable of delivering
phantom power or are limited in which channels can send it (smaller
mixers).
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