Our family just got a dog from the SPCA. Apparently, they put a microchip ID tag in her as standard procedure. I decided to find out what this was about.
A microchip uses radio frequency identification (RFID) technology, which is spreading to all kinds of applications. A pet microchip is a passive RFID tag. This means it does not use a battery or internal power source, so it doesn't run down and is cheap to make (less than a quarter). A tag has one of 275 billion different numbers on it, so they'll probably still have one for your pet.
The microchip is a little larger than a grain of rice (12 mm x 2 mm). A qualified person injects it with a hypodermic needle, usually between the shoulder blades, and usually without anesthetic. It is made of biologically compatible materials and some are coated with a material called Parylene C to encourage tissue fibres to grow around the tag and keep it in place.
A RFID reader reads a tag by sending out a suitable radio signal. The tag uses the energy to send the identification number back to the reader. The industry had a Beta-VHS problem of incompatibility early on, but now readers can read different frequencies. In Canada, the Canadian Veterinary Medicine Association has been promoting the International Standards Organization (ISO) system so that the process is more standardized.
So if you lose your pet and if (and this is important) you have registered your pet's number, you can be tracked down and reunited.
Microchip technology is being extended to some other applications like pet doors activated only by your pet's ID.