Team 1625 is using the US Digital MA2. It works well because it is an aboslute analog encoder that is the equivalent to a 10-bit digital. Plugs right into the RC Analog in, and gives 1024 different steps for one rotation so it has enough resolution for almost anyone. Its also pretty cheap too.
Here is the link.
http://www.usdigital.com/products/ma2/
Do Not Eat.