In order to solve the theoretical limitation of laser beam energy modulating commonly applied in existing laser beam-rider guidance system, the principle of realization of space polarization encoding and decoding using lithium niobate (LiNbO3) crystal for its electrooptic effect is studied. The electrooptic effect of LiNbO3 crystal is analyzed, based on which a modulator used in space polarization encoding system is designed. And applying the electric field in X direction is found to be the best means to make linear polarization have an expected polarization gradient distribution after passing encoder. Discussion of received data processing way proves that the difference over sum method is independent of rotation. Near field experiments using visible light in laboratory have got polarization states varying through approximately right-handed circular polarization on the top of the beam to the linear polarization at the center of the beam and then to left-handed circular polarization at the bottom of the beam. The curves of experiments show that experimental results accord with theoretical calculation basically.