@waqastariq
You got it right, it is the transponder RF chip which is embedded into the key.Here is some more explanation of how it works:
[I]A transponder system comprises two primary components being the processor/interrogator and a microchip (transponder) embedded within the head of the key. The processor usually interacts with the fuel injection and varied other vehicle electronics systems.
When an attempt to start the vehicle is made, the interrogator sends a burst of Radio Frequency (RF) energy - at a defined frequency - to an antenna which usually surrounds the face of the ignition cylinder. As the transponder contains a tuned circuit matched to the frequency of the RF burst, a small voltage is generated by induction within the transponder chip. Whether this charges a capacitor I don't know, but the result is that the induced voltage causes the transponder chip to emit, by RF, it's individual code number - a thirty two (32) digit number, which can also contain alfa numeric characters.
If the processor recognises the returned code number, it then allows the starter motor, fuel pump and/or fuel injection systems to function, and allow the vehicle to start. A common sign of a faulty or absent transponder is that the vehicle will start but will only run for a few seconds.
As suggested recently, it is the processor/interrogator module that is programmed with which key is allowed start privileges. The transponder chip is only an identification number for the key in which it is embedded. Interestingly, the amount of time it takes to start, send and stop the transmission of the code number is a factor as to whether the processor will accept the code. [/I]