What is signal encoding, why it is needed?

Answer 1

Depending on the exactly physical layer, signal encoding may be necessary to help embed clocking in the message. In an isochronous system, the receiver's clock is not precisely at the same frequency as the transmitters clock, and the receiver needs to see enough edges so that it can keep itself aligned to the transmitter's frequency. SONET scrambling is an example of this.

Similarly, if the link layer has an embedded control protocol, some encoding is necessary to either bit stuff the data so that it doesn't accidentally match the control protocol. HDLC is an example of this.