What is the chip inside the car key for?

A car key chip is a component that receives and sends back a pulse signal.

When the car key is turned on at the ignition switch, the engine control unit (ECU) in the car sends out a set of encrypted electronic coded signals to the chip in the car key, and only when the car ECU unit can read the feedback and receive the correct anti-theft coded signals will the vehicle be allowed to start.

So even a simple car key without any buttons can be used to turn on and off the vehicle's anti-theft system through the chip code inside as well. A car key with a chip requires the use of special dedicated original matching equipment to be able to program it.

Magnetic chip systems are passive in nature:

meaning they do not require electrical support or super energy of their own. They operate on a frequency of 125 kHz. When unsupported by external and self-sustaining energy, its transmission range is limited to 1 to 15 meters. Key recognition is similar in many automotive chip systems.

When a key is inserted into the ignition lock and turned to the "on" or "run" position, the ignition lock cylinder's readout coil reads the key's chip; the chips all have fixed numeric information, and the coil matches the readout with the digital information pre-stored in the anti-theft system. Anti-theft system pre-stored digital information against the test, once the same will continue to start the vehicle the next step; otherwise do not perform the subsequent steps.