In this work, by combining a polarization beam-splitter prism and a wave-plate, four sinusoidal signals with a phase difference of 90° were generated. The wave-plate was used for synchronous phase delay. The operation range of the diffraction grating displacement sensor was increased to one-half of the coherence length of the laser. By differentially processing two signals with a phase difference of 180°, it is possible to avoid the effects of the laser power stability, background light, and the temperature drift of the operational amplifier. Finally, an interpolation circuit was used to construct the arctangent function of the output signal to realize the nonlinear A/D conversion of the sinusoidal function and a displacement resolution of 2.54 nm. In the future, this type of high-resolution and large-range displacement sensor will promote the development of automation equipment, electronic manufacturing, and the industrial intelligence field.