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This is a basic setup allowing an Arduino to read the angle from a Panasonic encoder (Model EVQ-V5) or any other two-track gray-code based encoder.
The encoder in question basically consists of two button switches that are pressed in such a pattern that they register a pattern of 0's and 1's that makes each angle unique relative to its neighbor. One switch/track will return 0011 over four sequential angles while the other will return the opposite, 1100.