This question comes up a lot... AFAIK there has been no formal research on the question, but there are enough people who use significant quantities of DE in their bedding and compost it and report having noooo problems with the compost that I would tend to believe it's not an issue. (This does...
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No no, it is popular among many BYCers to add DE *to* a deep-litter pack made of other normal materials (shavings, straw, etc), the intent being control of moisture and odors.
I do not think it's generally a good approach myself, but, free country.
Pat