That's ingenious, but unfortunately it is liable to be a very inaccurate system with poor repeatability. Range will be affected by antenna characteristics, and alignment. Power level would vary between units. Local conditions and RF noise will have some effect.
Other options include
Acoustic, usually ultrasonic - time of flight or triangulation. Sometimes amplitude as you are doing.
RF - time of flight or swept Doppler Radar or triangulation.
LASER. Similar to RF, Phase detection, ...
Many of the robot sites discuss range finding methods.
I've seen three basic options for distance measurement: triangulation, measuring power drop from a source of known power, and measuring travel time for a signal of known velocity.
Signal power drop is an issue over 10 meters because of the inverse square law: if a signal can be detected 10m away, it's going to be 10000x stronger at a distance of 10 cm. For magnetic fields, for example, that's a difference between 60 uT (about the Earth's magnetic field) and 6 T (a very very strong magnet, which would rip the metal off anything nearby). You might could use RF power drop, but I expect that there would be similar safety issues, not to mention the FCC coming down on you like a ton of bricks.
You've got two basic options for timing signal propagation: sound, and EM fields. EM fields can't really give you the precision you want using travel time as your distance measurement, because 1 mm is about 3 picoseconds at the speed of light. I could be wrong, but that's orders of magnitude beyond what's a reasonable granularity for timing measurements with any hardware I've ever seen.
Sound is easier to work with, but can't really propagate at the distances you're talking about at frequencies over about 250 kHz. (http://www.katho.be/apps.aspx?smid=2688) The wavelength of 250 kHz is about 1.4 mm, so no one microphone is going to give you an arrival time down to the precision you want. Possibly some sort of interferometer? Not to mention that those high frequencies aren't going to work so well without line of sight.
Your best bet is probably triangulation. That requires three locations, not two, and might give you acceptable results if a third station is something you can work with. That changes the question to: how do I determine the direction to something, when it might change location by 1mm 10 meters away, giving a needed precision of five thousandths of a degree?
I'm afraid I don't know the answer to that one. :)
Best Answer
My guess is that limitation is due to a crappy output driver. So you could use a line driver to drive the wire to the first chip. Basically, all you need is an op amp with enough 'oomph' to drive the capacitance of the line. Alternatively, a differential driver is a good idea. I would suggest using an RS485 or RS422 to TTL translator chip. These are pretty easy to come by and will convert a single-ended signal into a differential signal with enough drive strength to drive quite a bit of cable. An RS422 chip might be ideal; it has an independent transmitter and receiver. You can put one of those on on each string of WS2811 to convert both the input and output signals for daisy-chaining.