Dog Leash Optical Encoder?

[Justin Stiltner]

Assuming you are using a legal potentiometer, then whatever you attach to it is fine as long as it meets the additional hardware rules.

What you are making is commonly called a string pot. you can get potentiometers that have multiple turns, in that manner you may not need to use the gearbox. A normal pot only turns about 270 degrees, a multi turn pot may turn 10 or more times.

I have used celesco string pots before with good results. They were about $60 per each when we bought them, and would be more reliable and faster than making your own. Good luck!
http://celesco.com/stringpots/index.htm