8-bit DAC, one XOR (exclusive or) gate
output 0 is bit0 xor Bit 1 output 1 is bit1
but potentiometers typically don't do complete revolutions. if you intend using a multi-turn pot you'll need more than 8 bits in your dac to get 256 changes per revolution.
what's wrong with the optical rotary encoder from an old mouse? you might need to gear it up a bit to get 256 per revolution but small gears can be had...