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I am using the Mini for a similar situation; in my case the rotary encoder pulses let us know where cherries are as they move along the sorting line. The encoder is an Autonics E50S8-200-3-t-24, with totem pole output. The B phase is wired to Int0, the Z phase to Int1 and the A phase goes to pin A3 (PC3). The internal pullup resistors are enabled. The input signals are very clean.
However, the output signals on pins D4 and D5 (PB0 and PB1) are not clean. The output pins float when the output value is 0. When the output is 1, the signals are a decent high. I have to include a pulldown resistor (1K) and with the pulldown, the output signals are quite clean. I don’t understand why I need an external pulldown for the ATmega328P pins. If anyone has a suggestion, it would be great.