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Originally Posted by Michael Hill
I get that, but I'm more curious in how they physically/electronically work.
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The AMT is unique among modular incremental encoders because it is capacitive (the same technology used in digital calipers) and not optical. This eliminates handling of the sensitive optical disk and issues related to LED burnout from the photo diode.
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So it's probably reading position as an analog value (the capacitance), and then converting to digital. The dip switches just set the resolution at which you convert (just a scalar).
This is pretty common with magenetic encoders too (selectable resolution).