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What's the difference between analog and digital signals?
An analog signal is a signal where the voltage changes indicating a range of values -- this is used for sensors like oil, air and fuel pressure. Or position sensors like throttle position.
Digital signals can be either a square wave (typically from a hall-effect) sensor, or a sine wave (from a variable reluctance or magnetic sensor). The digital signals can provide a time position of the edge of the signals. These are used for crank position and cam position sensors. The ECU understands the pattern and timing of these signals in order to figure out the crank shaft position and engine speed. Digital inputs are also used for things like buttons, switches, wheelspeed sensors.
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Analogue is like the brightness of a light bulb, digital is like how fast it flashes, these are simple 2 wire (possibly using chassis/frame earth/ground and a single wire).
There are also devices used to digitally read analogue voltages, and vice versa - these use 3 wires and compare the sender voltage to a reference voltage, and these compensate for wiring voltage variations.
The first works quite well, if you know how bright it is supposed to be, and how it's supposed to change, but if there's a problem with the voltage/current, that affects the brightness, too, and you may not know there's a different problem. Also, with the flashing, it's either on or off, so as long as that's working it's good - there can be a problem, though, as if the wiring is broken the sender may be stuck either high, or low, and some systems aren't able to register that as a fault.think of it like Morse Code for the ECU - is there no flash because the sender is broken or because there just isn't any message to send, or is it stuck on because there's a big problem with the sender, or something shorted out?
The three wire will, for say a 0-5V sender, usually start at 0.5V and go to 4.5V - this allows the sender to give a variable value, and if the ECU reads 0V or 5V it will KNOW there's a fault because it's outside the correct voltage range.
[edit] One big problem that can affect digital, that analogue is more resistant to (well, not the old AM radios when you have bad coil suppressors, solid core HT leads, or other issues - but that's more EMF than voltage, although a bad alternator can show up on either AM or FM, because it's a voltage fluctuation), is if there are other devices on the same power, or ground, or nearby, that cause voltage spikes in the wiring, the ECU may read that as a signal, and do something it shouldn't. HT leads, and high current carrying lines can be a real problem, like with PWM (Plse Width Modulation) where currents are rapidly switched on and off.