Wow, very cool way to add an encoder. I hope Vex seriously considers adding something like this as an option for VersaPlanetarys in the future.
The only concern I have (aside from the potential issues others have already pointed out regarding high RPM applications) is that, though this setup does track rotations at the motor, it isn't fault tolerant if some other part of the gearbox breaks.
One of the nice things about most gearbox-mounted encoders is that they are usually connected directly to the output shaft and show its actual rotation (short of a shaft failure, I suppose). With this, if you strip (or partially strip) a gear, the sensor has no way of detecting or compensating for it. Granted, I have never experienced this failure mode on a VersaPlanetary (actually, the only failure I've ever had with one was the input coupler itself), but it seems like it could be plausible.
Or I could just be paranoid.
