As pilots well know, altimeter settings change with location, and if a pilot forgets to reset the altimeter to the local setting, the altimeter will read either above or below the actual altitude. Using 29.92 as the basis for encoded altitude precludes this problem because all aircraft in the same area will be reporting the same altitude regardless of the actual altimeter setting. ATC computers adjust encoded altitude from 29.92 to the local altimeter setting before it reaches the controller's radar screen. ATC must verify the encoded altitude's accuracy, so if a pilot doesn't report his altitude in 100-foot increments when checking in with ATC, the controller will request it
Encoded altitude is the basis for TCAS, installed on air carrier and many turbine-powered business aircraft. A TCAS unit examines all the transponder signals from aircraft around it, looking for those that are at the same encoded altitude, or converging. When it finds one that poses a potential collision threat, it warns the pilot and suggests specific evasive action.
An encoding altimeter has the encoder contained within the altimeter, while a blind encoder is separate from the altimeter. In the end they both do the same thing. Using digital information supplied by the encoder, the transponder transmits the aircraft's altitude to ATC in 100-foot increments. If ATC says your encoded altitude doesn't match your reported altitude, your first action should be to check your altimeter setting (the barometric pressure set in the altimeter's Kollsman window) to make sure it's correct. If your altimeter setting is correct, your altitude encoder is not transmitting the correct altitude. If the difference is 300 feet or more, ATC likely will ask you to "Stop altitude squawk; altitude differs (number of feet) feet." Recycling the transponder by turning it off then on may fix this problem. If it doesn't, the airplane must visit the avionics doctor for pitot-static, encoder, or transponder repair.