Conventional eddy-current sensors have the advantages of being contactless and having high bandwidth and high sensitivity. They are widely used in micro-displacement measurement, micro-angle measurement, and rotational speed measurement. However, they are based on the principle of impedance measurement, so the influence of temperature drift on sensor accuracy is difficult to overcome. A differential digital demodulation eddy current sensor system was designed to reduce the influence of temperature drift on the output accuracy of the eddy current sensor. The differential sensor probe was used to eliminate common-mode interference caused by temperature, and the differential analog carrier signal was digitized by a high-speed ADC. In the FPGA, the amplitude information is resolved using the double correlation demodulation method. The main sources of system errors were determined, and a test device was designed using a laser autocollimator. Tests were conducted to measure various aspects of sensor performance. Testing showed the following metrics for the differential digital demodulation eddy current sensor: nonlinearity 0.68% in the range of ±2.5 mm, resolution 760 nm, maximum bandwidth 25 kHz, and significant suppression in the temperature drift compared to analog demodulation methods. The tests show that the sensor has high precision, low temperature drift and great flexibility, and it can instead of conventional sensors in applications with large temperature variability.