You can find pretty cheap devices like this and also this.
What makes them even more interesting is the fact that the built-in microcontroller is an ATmega32u2. You can get a bootloader for this chip here.
And to make it even simpler to mod these, I've created some helper library to support the built-in hardware:
All required libraries are already in the Arduino library manager.
My GitHub page has some instructions on how to mod the board.
My library comes with a few examples.
Please post your own "rotary encoder project ideas" here