distortion
1 bit quantizer is linear in terms that the output is always two levels (i.e. u can model Vo/Vi by a straight line) but since the gain is input dependent u can say that it is not linear.
while in case of multi-bit quantizer the transfer c/c's can deviate from a straight line which means non-linearity (due to mismatch) but u gain good control on the gain with respect to the input.
so it depends on ur definition of linearity.
DEM is used to convert mismatch error into white error (on the whole fs band ) so u get a reduced mismatch noise in ur band (called mismatch shaping)