Does Arduino wait till the sensor has a discrete value?
Any use of a digital encoder device (mechanical, optical, or magnetic) works on the ability of the decoding circuitry (read that as arduino input pins and correct coding) to quickly detect a change of state of either channel's on/off signal. The mechanical seperation of the encoder channel sensors insures that the signals will always have 90 degrees (in the time domain) of seperation between the channels, so with accurate detection of when the channel signals change and adding proper decoding formula, one can accuratly determine when a step occurs and in what direction. If one only needed to know speed information, then just measuring the frequency of a single channel would be all that is required.
Lefty