Aircraft equipped with a transponder require an external signal input from an altitude reporting device, in the form of an altitude encoder or an encoding altimeter. Dynon's EFIS and FlightDEK instruments always provide this signal output as a standard feature.
Dynon's altitude signal output is an RS-232 serial data stream that is compatible with newer style transponders like the Garmin GTX-330 and GTX-327. Transponders only accepting the traditional gray code (sometimes called Gillham code) input require Dynon's optional encoder converter module.
The encoder converter is a small box that converts the two wire EFIS serial data output into the multi-wire connection required by transponders that need gray code input.
Check with your transponder manufacturer to see if the Dynon encoder converter is required.