$encode and $decode are a very basic encoding/decoding method. It is unlikely that what you saw was using those. There are other methods that use a stronger encryption that are available and one of those is more likely what you saw. Those require that the people speaking all have a decoding "key" in order to decode the text correctly.
You can easily google encryption methods for mIRC to get a variety of options to choose from. One popular example would be FiSH. Or, if you want to gain some experience in the basics of how it works, you can script a very basic method yourself. All you do is replace each character with a different character based on a set key and the decode it by replacing the new characters with the old by using the same key. For example, in a very basic encryption, maybe you just shift the letters X characters. So "Hello" encrypted with the key of 2 might become "Jgnnq" and then decoding that would be done as -2 characters back to "Hello". Of course, that is extremely basic and easily figured out. True encryption does much more than just shift characters around. But this kind of basic encryption does let you try different things and get an understanding of how it works much more easily than trying to figure out how secure encryption works.
