Like previous Fujifilm cameras, the X-T1 offers two expanded dynamic range settings, labelled DR200 and DR400 (the standard setting is DR100). Technically they work by applying less amplification to the data that's read from the sensor to avoid clipping highlights, then compensate by applying a different tone curve to lift the midtones to the correct brightness. Because of this, the minimum available sensitivities are limited to ISO 400 with DR200, and ISO 800 with DR400. (Note that shooting at ISO 100 in effect does the opposite, and reduces highlight range by a stop).
To incorporate this additional highlight range into its JPEG output, the camera uses different tone curves for each DR setting. These progressively reduce the contrast in the highlights to accommodate the additional detail, while still presenting the mid-tones and shadows correctly. But this necessarily means that the local contrast decreases, resulting in 'flatter' highlights, especially at DR400.
|DR100 (ISO 200)||DR200 (ISO 400)||DR400 (ISO800)|
The example above shows how the X-T1's DR settings work in practice. Roll your mouse over the labels, and you can see how progressively more detail is retained in the sky as the DR is raised. However the DR400 version does end up looking a little 'flat', which is an inevitable consequence of trying to exploit all of that highlight range using just a global tone curve change (as opposed to localised adjustments).
Because the higher DR settings require higher ISOs, there's some penalty to be paid in terms of critical image quality, particularly in terms of noise and low-contrast detail. In many real-world images this isn't hugely problematic, but in this particular example fine low-contrast detail visibly suffers at the higher DR / ISO combinations. This is shown in the crops below - see how the brickwork and window frames are visibly less well-defined at ISO800.
|DR100 ISO200, 100% crop||DR200 ISO400, 100% crop||DR400 ISO800, 100% crop|
Because there's so little penalty to shooting at DR200, and it can frequently be beneficial in real-world images, we're generally inclined to leave it set by default. Then whenever the ISO is set to 400 or higher, the camera will retain this additional highlight detail all the time. We generally wouldn't recommend JPEG users shoot at DR400 unless it's absolutely necessary, because most of the time you end up with a slightly flat-looking file, but little practical benefit in terms of highlight detail. However for Raw shooters wishing to retain the best possible options for highlight recovery, there's really no penalty to using the DR400 setting.
Relevance of DR settings to Raw
It's tempting to think of DR settings as being most relevant for JPEG shooters, but they apply equally to Raw capture. As usual, it's possible to recover highlight detail that's lost in the camera's JPEGs even at DR100, but there's potentially an extra stop of fully-recoverable highlight data at DR200, and two stops in a DR400 file. This does depend on the dynamic range of the scene and the camera's metering, though; often DR 200 will retain all of the useful highlight data.
Both Adobe Camera Raw and Capture One recognise the DR mode tags in the Raw files, so render their output at the correct brightness, but neither applies the different tone curves necessary to incorporate any additional highlight information. This means so you'll need to manually adjust DR200 and 400 images to get the full benefit.
Auto ISO and DR settings
It's also important to understand that the DR setting influences how the camera behaves when you use Auto ISO. If you set DR200 then the camera will generally shoot at ISO400 or higher, and if you set DR400 it'll shoot at ISO800 by default, even on a bright sunny day. One way to deal with this is to set the DR to 'Auto' - the camera will then attempt to balance the DR and ISO settings for the optimal overall image quality
ISO 100 mode
The ISO 100 setting (which is only available in JPEG mode) is essentially the opposite of the camera's DR extension modes: it records the exposure higher up the camera's response range and uses a different tone curve from the other ISO settings to ensure that the correct image brightness is still achieved.
Just as with the DR modes, we see the same trade-off of highlight tonal range vs noise in the shadows. You would expect to see slightly less noisy shadow regions at ISO 100 (though you may need to use one of the camera's 'softer' shadow tone options in order to see the difference), but at the cost of less highlight detail being captured.
Overall, though, we'd generally avoid using ISO 100, due to both the loss of highlight range and the X-T1's curious inability to record a Raw file at this setting. Plenty of other cameras have pulled 'Low' ISO settings, and none of them impose this arbitrary restriction.