Big Clive also covered this a couple years later. Has more of an emphasis on the teardown and schematic. The comments are also great for links to other people's findings. This article is great for more details about how the electrons move.

https://www.youtube.com/watch?v=fKSSY1gzCEs

I'd like to adapt the concept using flexible pcbs to make a largish Nest-style rotary encoder.

To understand Vernier measurement conceptually, the Wikipedia article is actually not bad: https://en.wikipedia.org/wiki/Vernier_scale