From Jeremy S. Cook on the Tindie blog:

Rotary Encoder with I2C Interface and RGB Lighting

Makernet Knob’s makes the point that “Rotary encoders are cool but hard to wire into your projects.” Having wired up a custom input device for my computer using an encoder, I can attest to both of these statements. In my case, it took me quite a bit of time simply to figure out how each encoder pin was used!

To help alleviate complicated wiring issues, this custom knob features a built-in I2C interface, which allows several (even hundereds) of knobs to be chained together without issue. Additionally, the top of the encoder can be depressed as a pushbutton, and it even has an RGB LED integrated inside of it to give you feedback right on the knob