The rotary angle encoder module is used to measure both angles and RPM. The Rotary encoder is an incremental encoder as has no limit for number of counting (This way it is different than potentiometer). It can also detect clockwise and counter clockwise rotation and that’s why it has 2 pins for detecting rotation.  

Basically, it translates the  rotary motion into a sequence of pulse signals. By comparing the square wave generated from each of the two pins you can determine the direction of rotation. and by counting the number of pulses you can determine both the rotation angle and the RPM of the rotating shaft. 

Features

• 0-10kΩ with 100 steps
• Used as 3-terminal potentiometer or 2-terminal variable resistor
• Up to ±5V across the potentiometer end-points
• 4.4mA current sink or source capability
• Red power LED is lit when power is applied
• 3-wire control interface
• 5V logic compatible

X9C103S Digital Potentiometer datasheet

Interfacing X9C103S Digital Potentiometer Module with Arduino