If I am correct, the majority of components today are using the optical encoder method. It can't be a rheostat, as you can turn the knob 'round and 'round until you turn blue in the face! A lot of car stereo's with knobs use them too. I think the 'wild volume' incident can be related to this as well. You have to calculate both the number of pulses and the direction of pulses. For a project I did where I designed my own encoder (LED’s and a wheel), you put 2 LED’s in, one to 'count' and one to determine phase. The high end encoders, like on CNC machines are quite accurate, but cheap ones, like in your mouse or possibly the volume control, might occasionally misunderstand the phase difference if you turn the knob very fast.

I definitely think its the way to go, as I think the occasional volume change problem is worth a non-contact, minimal wear solution.

S.