There are three distinct encoders all of which are based on the same principle of having two repeating signals out of phase by 90 degrees. The three different type are optical (most known), magnetic (for the utmost harsh conditions), and capacitive (most space saving). Each one has their own benefits and pitfalls. For example, magnetic is nice for a harsh condition, but the resolution is nowhere near an optical. According to wikipedia, "Digital calipers contain a linear encoder. A pattern of bars is etched directly on the Printed circuit board in the slider. Under the scale of the caliper another printed circuit board also contains an etched pattern of lines. The combination of these printed circuit boards forms two variable Capacitors. As the slider moves the capacitance changes in a linear fashion and in a repeating pattern. The two capacitances are out of phase. The circuitry built into the slider counts the bars as the slider moves and does a linear interpolation based on the magnitudes of the capacitors to find the precise position of the slider." So if you look up on how to interpret square wave pulses out of phase, one could easily make a scale using a device such as one of these http://usdigital.com/products/interfaces/ics/ . There are also absolute encoders which are potentially better suited for digital caliper applications. These guys are a little more trivial to decode as one just reads the code at the current location instead of trying to keep track of signals.