Jesse, This kit expects to use a 5V single ended quadrature encoder. So electrically, that is what you should be targeting. As far as number of lines goes, it really depends on you application. If you are looking for very precise servo-like control you will need at least 2500 lines on your encoder (I've used a 10k line encoder for test purposes and it works really well). For slower dynamic speed or position control a 500 line encoder is more than adequate. I really like the encoders from US Digital, they work really well and are priced decently. I've never ran into weird issues with them. I've worked with some customers who are using a hall angle sensor with a magnet, but these can be kind of tricky to work with. I've also ran into customers who are using a Sin/Cos encoder and are converting that into angles. Really, just about anything is possible, but the simpilest path would be to pick up a 5V quadrature encoder. It will be very robust and quick to integrate with that kit.
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